MONEY  AND  CURRENCY 


IN   RELATION  TO   INDUSTRY, 

PRICES,  AND  THE  RATE 

OF   INTEREST 


BY 


JOSEPH    FRENCH    JOHNSON 

PROFESSOR  OF  POLITICAL  ECONOMY  IN  NEW  YORK  UNIVERSITY 

AND  DEAN  OF  THE  SCHOOL  OF  COMMERCE, 

ACCOUNTS,  AND  FINANCE 


GINN  £  COMPANY 

BOSTON  .  NEW  YORK  .  CHICAGO  •  LONDON 


COPYRIGHT,  1905,  BY 
JOSEPH    FRENCH  JOHNSON 


ALL   RIGHTS   RESERVED 


57-9 


iatfltnaum 


GINN   &  COMPANY  •   PRO- 
PRIETORS •  BOSTON  •  U.S.A. 


TO 
MY  FRIEND 

HERMANN  HENRY  KOHLSAAT 

A  STANCH  FRIEND 

OF 
SOUND  MONEY 


290304 


PREFACE 

There  are  so  many  books  upon  money  that  the  author  of  a 
new  one  needs  to  offer  a  word  of  justification.  This  book  differs 
from  others  in  several  important  respects.  While  it  is  intended 
to  be  a  complete  exposition  of  the  science  of  money,  aiming  its 
appeal  at  the  understanding  rather  than  at  the  prejudices  of 
men,  its  unique  characteristics,  if  it  possess  any,  will  be  found 
in,  the  deep  practical  significance  it  discovers  in  the  phenomena 
of  price,  in  its  analysis  of  the  demand  for  money,  in  its  exposi- 
tion of  credit  as  related  to  prices  and  the  rate  of  interest,  and 
in  the  clearness  it  gives  to  the  concepts  of  commodity  money, 
fiat  money,  and  credit  money. 

This  book  deals  with  money  as  an  independent  economic 
entity,  and  seeks  to  bring  out  the  fact  that  " price"  in  the  world 
of  business  is  a  more  important  word  than  "value."  Economists 
have  too  generally  assumed  that  money,  being  only  a  medium 
of  exchange,  can  be  left  out  of  calculation  in  a  scientific  expla- 
nation of  the  phenomena  of  production  and  consumption.  They 
reduce  trade  to  terms  of  barter,  assuming  that  men  work  for 
goods  and  that  they  exchange  goods  for  goods.  Money  cannot 
thus  be  set  aside.  It  is  itself  an  economic  good,  one  of  the 
most  important  in  the  entire  list ;  and  changes  in  its  value 
exert  a  powerful  influence  on  the  production  and  distribution  of 
wealth.  Indeed,  the  welfare  of  society  is  influenced  more  by 
changes  in  its  value  than  by  changes  in  the  value  of  any  other 
commodity.  As  is  pointed  out  in  Chapter  VI,  the  maladjust- 
ment of  prices  caused  by  a  change  of  relation  between  the 
money  demand  and  the  money  supply  is  equivalent  to  a  new 
alignment  of  values.  As  a  result,  the  markets  for  goods  are 


vi  PREFACE 

sometimes  depressed  or  stimulated  by  forces  that  greatly  puzzle 
the  practical  man. 

In  recent  years  the  theory  of  money  has  been  beclouded  by 
controversy  over  what  is  called  the  "  quantity  theory  of  money." 
In  no  scientific  treatise  has  any  theory  deserving  such  an  appel- 
lation been  expounded.  Certain  writers,  it  is  true,  in  explaining 
the  law  of  demand  and  supply  as  determining  the  value  of 
money,  have  failed  to  give  due  recognition  to  the  variable 
nature  of  demand,  and  so  have  seemed  to  imply  that  the  level 
of  prices  —  that  is,  the  value  of  money  —  depends  almost 
wholly  on  the  quantity  of  money  in  existence.  In  order  that 
there  may  be  no  excuse  for  such  a  crude  inference,  *he  demand 
for  money  and  the  circumstances  upon  which  it  depends  are  in 
this  book  subjected  to  careful  analysis.  It  is  shown  that  the 
demand  or  need  for  money,  on  account  of  changes  in  the  use 
of  credit,  in  money  efficiency,  and  in  the  total  volume  of 
exchanges,  is  subject  to  great  fluctuations  within  short  periods 
of  time.  Any  mere  "  quantity  theory  of  money,"  therefore,  must 
be  as  inadequate  as  would  be  a  "quantity  theory  of  wheat." 

To  fiat  money,  a  subject  which  has  too  generally  been  slighted, 
two  chapters  are  given.  It  is  important  that  the  conditions  which 
govern  the  value  of  such  money  be  clearly  understood.  So  long 
as  people  think  that  its  value  is  due  to  the  government  stamp  or 
to  an  act  of  Congress,  its  advocates  in  the  United  States,  par- 
ticularly during  periods  of  industrial  and  trade  depression,  will 
too  easily  get  the  public  ear.  In  order  to  illustrate  the  princi- 
ples involved,  and  to  emphasize  the  elements  of  peril  inherent 
in  the  use  of  fiat  money,  a  chapter  is  devoted  to  a  discussion  of 
the  greenbacks  and  their  value  during  the  period  when  they 
were  the  standard  of  prices  in  the  United  States.  The  author's 
conclusion,  namely,  that  the  greenbacks  during  this  period  were 
essentially  fiat  money,  getting  their  value  from  their  utility  as 
money  rather  than  from  the  government  promise  they  bore,  will 
doubtless  arouse  some  criticism. 


PREFACE  vii 

The  theory  of  money  and  credit  is  developed  in  the  first  four 
chapters.  All  the  remaining  chapters  are  illustrative  of  the 
theory.  In  order  that  the  illustrations  may  be  in  harmony  with 
actual  conditions,  the  forces  governing  the  ebb  and  flow  of 
currency  and  gold  are  described  in  Chapter  V.  Chapters  VI, 
VII,  and  VIII  show  how  important  is  the  relation  which  money 
and  credit,  through  the  medium  of  price  and  the  rate  of  interest, 
bear  to  industry  and  the  general  welfare  of  society.  The  use  of 
gold  and  silver  as  money  is  considered  in  the  next  four  chapters, 
the  issues  raised  in  the  long  debate  over  bimetallism  and  the 
free  coinage  of  silver  being  reviewed  in  order  that  the  principles 
at  stake  may  be  brought  to  light.  Fiat  money  constitutes  the 
important  subject  of  Chapters  XIII  and  XIV,  the  author's 
theory  and  conclusions  being  reenforced  by  facts  from  the 
experience  of  several  countries.  Credit  money,  which  is  not 
money  at  all,  but  a  form  of  credit  possessing  general  accept- 
ability, is  treated  in  Chapter  XV.  The  need  for  an  elastic 
element  in  the  currency  —  a  need  that  can  be  satisfied  only  by 
credit  money  —  is  here  considered.  The  last  two  chapters  deal 
with  the  monetary  experience  of  the  United  States.  Here,  as 
elsewhere,  principles  are  made  more  conspicuous  than  the  facts 
of  coinage  and  legislation,  it  being  manifestly  more  important 
to  know  why  silver  dollars  are  valuable  than  to  know  how  many 
of  them  have  been  coined. 

The  author  has  written  for  practical  men  as  well  as  for 
students  in  high  schools  and  colleges.  For  this  reason  the 
technical  terminology  of  modern  economics  has  been  avoided. 
For  example,  the  phrase  "  marginal  utility,"  which  conveys  no 
idea  that  cannot  be  set  forth  in  everyday  speech,  occurs  only 
once  or  twice  and  then  is  not  essential  to  the  context.  Definite 
meanings  are  given  to  the  words  " money,"  "credit  money," 
''currency,"  "cash,"  "circulation,"  etc.,  and  an  effort  is  made 
to  be  consistent  in  their  use.  The  book  is  entitled  Money  and 
Currency  partly  for  the  purpose  of  making  prominent  the  fact 


viii  PREFACE 

that  these  two  words,  although  often  used  as  synonyms,  are 
essentially  different  in  meaning. 

While  the  book  is  not  intended  to  be  historical  or  descriptive 
in  character,  the  reader  will  find  in  it  the  salient  facts  of  every 
important  monetary  system  and  most  of  the  data  that  have 
served  as  the  basis  for  argument  in  recent  controversies.  Teach- 
ers who  wish  to  give  their  students  a  wider  acquaintance  with 
the  history  of  money  and  with  the  details  of  coinage  are  recom- 
mended to  use  in  connection  with  this  book  Mr.  Horace  White's 
admirable  treatise  Money  and  Banking, 

I  wish  to  record  my  indebtedness  to  Professor  Harry  R. 
Seager,  who  has  read  the  proofs  and  made  many  helpful  sugges- 
tions;  to  Hon.  Frank  A.  Vanderlip  and  Hon.  Lyman  J.  Gage, 
from  whom  I  have  obtained  much  practical  information;  and  to 
Hon.  George  E.  Roberts,  Director  of  the  Mint;  Hon.  William  B. 
Ridgely,  Comptroller  of  the  Currency;  and  Hon.  O.  P.  Austin, 
Chief  of  the  Bureau  of  Statistics,  —  who  have  promptly  and  fully 
answered  many  letters  of  inquiry. 

JOSEPH  FRENCH  JOHNSON 
NEW  YORK  UNIVERSITY 
March,  1906 

In  this  second  impression  several  errors  have  been  corrected 
and  certain  statistical  and  other  data  brought  up  to  date.  The 
author  hopes  that  his  colleagues  in  the  United  States  will  help 
him  to  improve  the  next  edition  by  calling  his  attention  not  only 
to  inaccurate  and  ambiguous  statements  but  also  to  any  passages 
of  exposition  that  seem  to  perplex  the  student  unnecessarily. 

APRIL,  1907 


CONTENTS 

CHAPTER  PAGE 

I.  THE  MEDIUM  OF  EXCHANGE i 

II.  NATURE  AND  VALUE  OF  MONEY 11 

III.  NATURE  AND  USES  OF  CREDIT 34 

IV.  CIRCUMSTANCES  AFFECTING  DEMAND  AND  SUPPLY  ....  55 
V.  DOMESTIC  AND  FOREIGN  EXCHANGE 77 

VI.  THE  RELATION  OF  MONEY  AND  CREDIT  TO  PRICES  ....  103 
VII.  THE  RELATION  OF  MONEY  AND  CREDIT  TO  THE  RATE  OF 

INTEREST 135 

VIII.  THE  IMPORTANCE  OF  PRICE 161 

IX.  COMMODITY  OR  METAL  MONEY 177 

X.  PRODUCTION  AND  VALUE  OF  THE  PRECIOUS  METALS    .     .     .  202 

XI.  MONOMETALLISM  vs.  BIMETALLISM 217 

XII.  THE  SILVER  QUESTION 241 

XIII.  FIAT  MONEY:  ILLUSTRATED  BY  THE  GREENBACK     ....  263 

XIV.  FIAT  MONEY  IN  FOREIGN  COUNTRIES 291 

XV.  CREDIT  MONEY 315 

XVI.  MONEY  IN  THE  UNITED  STATES 340 

XVII.  Is  THE  GOLD  STANDARD  SECURE? 366 

APPENDIX 

I.  Gold  Standard  Act  of  March  14,  1900    ....   %.     ...  381 
II.  Amendment  of  Gold  Standard  Act 388 

III.  Daily  Treasury  Statement 389 

IV.  Monthly  Circulation  Statement 390 

V.  Value  of  Gold  Coin  and  Bullion  Imported  into  and  Exported 

from  the  United  States,  1860-1905 391 

VI.  Gold  Price  of  Bar  Silver 392 

VII.  Commercial  Ratio  of  Silver  to  Gold 393 

INDEX 395 


CHARTS 

PAGE 

I.   Value  Relation  of  Gold  and   Silver  during   the  Nineteenth 

Century 230 

II.    Fluctuations  in  the  Values  of  Gold  and  Silver  from  1870  to 

1904  .     249 

III.  Price  Changes  during  the  Greenback  Period  compared  with 

Changes  in  the  Supply  of  Money 281 

IV.  Greenback  Price  of  Gold  compared  with  Greenback  Prices  of 

Commodities  from  1862  to  1878 286 

V.   Value  Changes  of  Indian  Rupee  from  1892  to  1899  compared 

with  Value  Changes  of  Gold  and  Silver  ....     305 


DIAGRAMS 

I-III.   Relation  of  Prices  to  Goods  and  to  Money     .         .         .          29-3! 
IV.    Relation  of  Capital  Goods  to  Capital  Funds   .         .         .         .141 
V.   Relation  of  Gold  Coin  to  Gold  Bullion  when  Free  Coinage  is 

permitted 181 

VI.   Relation  of  Coin  to  Bullion  when  Coinage  is  restricted  .         .     267 


MONEY  AND   CURRENCY 

CHAPTER  I 

THE  MEDIUM   OF   EXCHANGE 

i.  Money  devised  to  overcome  the  difficulties  of  barter.  2.  Its  evolution  was 
unconscious.  3.  Money  is  the  most  exchangeable  thing  in  any  market.  4.  Money 
was  probably  first  used  as  a  medium  of  exchange  and  not  as  a  standard.  5.  Modern 
credit  is  a  promise  or  contract  to  deliver  money  at  some  future  time.  6.  Two 
classes  of  credit  and  their  relation  to  prices.  7.  Seven  different  uses  or  definitions 
of  money.  8.  Distinction  between  money,  credit  money,  currency,  and  cash. 
9.  "  Price  "  and  "  profit "  the  important  words  in  business. 

I.  It  is  commonly  assumed  that  the  historian,  if  he  could 
carry  his  researches  back  far  enough,  would  come  upon  a  time 
when  men  severally  produced  all  that  they  consumed,  — an  age 
of  few  wants  and  no  exchanges  except  by  force.  To-day  it  is  diffi- 
cult for  us  to  picture  the  human  race  under  such  primitive  con- 
ditions. There  is  hardly  a  child  who  is  not  familiar  with  the 
words  "  buy "  and  "  sell,"  and  in  the  United  States  there  is 
probably  no  family  whose  members  produce  all  the  things  they 
consume.  We  do  not  know  when  the  era  of  exchanging  began. 
We  can  only  conjecture  that  men  gradually  discovered  by 
experience  that  their  comfort  could  be  increased  by  a  division 
of  labor  which  permitted  each  worker  to  devote  himself  to  the 
tasks  for  which  he  had  most  skill. 

Money  is  a  tool  invented  to  overcome  the  difficulties  of  barter. 
By  analysis  of  the  double  difficulty  which  under  a  barter  economy 
confronted  a  man  wishing  to  exchange  his  surplus  product,  the 
utility  of  money  becomes  evident.  In  order  that  goods  might  be 
exchanged  for  goods,  a  rare  coincidence  of  wants  was  essential. 
A  man  who  had  arrows  which  he  wished  to  exchange  for  fish  was 


MONEY  AND   CURRENCY 

obliged  to  find  a  man  who  had  fish  which  he  wished  to  exchange 
for  arrows.  Evidently  his  problem  would  be  greatly  simplified 
if  there  were  one  thing  universally  and  at  all  times  wanted,  for 
then  he  need  only  find  a  man  who  wanted  arrows  and  take 
from  him  that  thing  in  exchange ;  with  that  in  hand,  having 
found  a  man  who  had  food  to  spare,  he  could  obtain  it  by  sur- 
render of  the  thing  which  everybody  desired. 

2.  Concerning  the  origin  of  money  we  can  only  speculate, 
for  we  have  no  record  of  a  time  when  money  was  not  used. 
Money,   like  speech,   is   doubtless    a   product   of    unconscious 
evolution.     We    do   not  know  what  substance  was  first  used 
as  money,  but  it  seems  certain  that  it  must  have  been  in  the 
beginning  some  object  of    universal  desire.     Our  knowledge 
of  the  tastes  of  primitive  men  and  women,  and  of  their  mod- 
ern descendants,  gives  color  to  the  hypothesis  that  the  first 
money  consisted  of  some  personal  ornament.    In  the  case  of  a 
people  living  by  the  sea,  for  example,  rare  and  beautiful  shells, 
if  admired  and  prized  by  all,  might  naturally  have  begun  to 
serve  as  a  medium  of  exchange.    A  man  who  had  spent  the  day 
fishing,  and  had  got  more  fish  than  he  and  his  family  could  eat, 
would  be  glad  to  exchange  some  of  his  catch  for  other  articles 
which  he  desired.    If  he  found  a  man  who  wanted  fish,  and  had 
nothing  to  give  for  them  except  these  beautiful  shells,  he  would 
be  tempted  to  make  an  exchange  even  though  he  himself  had 
no  desire  for  more  shells,  for  he  would  be  better  off  with  a  sur- 
plus of  shells  than  with  a  surplus  of  fish,  since  the  shells  were  in 
more  general  demand.    It  is  easy  to  see  how,  under  such  circum- 
stances, men  and  women  might  devote  whole  days  to  hunting 
shells,  and  at  the  end  of  each  day  exchange  part  of  their  stock 
for  food  and  other  articles  of  desire,  the  shells  thus  gradually 
coming  into  use  as  a  current  or  common  medium  of  exchange. 

3.  In  some  such  fashion,  doubtless,  the  evolution  of  money 
began.     The  concepts   expressed    by  the  words    "  buy "   and 
"  sell "  are  a  product  of  the  money  economy.    The  buyer  gives 
up  money ;  the  seller  receives  it.    The  exchange  is  one  of  real 
values  or  utilities,  but  it  differs  from  barter  in  that  only  one 
party,  instead  of  both,  as  in  barter,  gets  an  object  that  may 


THE  MEDIUM   OF   EXCHANGE  3 

directly  and  immediately  satisfy  desire.  The  seller  wants  the 
money  and  accepts  it,  not  because  he  expects  to  get  pleasure  from 
retaining  it,  but  because  he  knows  that  it  is  the  most  exchange- 
able thing  in  the  market,  and  that  with  it  he  can  most  easily 
obtain  the  things  which  will  satisfy  his  tastes  and  needs.  He 
wants  money  merely  because  of  its  exchangeability.  In  our 
hypothetical  illustration  shells  were  used  as  money  because 
there  was  a  universal  want  for  them.  They  were  the  most 
exchangeable  thing  in  the  community,  and  it  was  that  exchange- 
ability which  fitted  them  to  serve  as  money.  Just  so  soon  as 
men  began  to  exchange  their  surplus  products  for  shells,  not 
because  they  wanted  them  as  ornaments,  but.  because  they 
expected  to  exchange  them  for  other  things  which  they  wanted, 
the  shells  began  to  perform  a  new  economic  function,  and  to 
be  in  demand  on  that  account.  They  served  as  ornaments  on 
account  of  their  beauty ;  they  served  as  money  on  account  of 
their  immediate  and  universal  exchangeability. 

4.  Some  writers  hold  that  the  first  service  of  money  was  as 
a  standard  of  values,  and  not  as  a  medium  of  exchange.    As 
exchanges  increased  it  is  supposed  that  a  need  arose  for  some 
standard  with  which  all  articles  could  be  compared  in  order  that 
a  basis  of  exchange  might  easily  be  reached.     It  is  difficult  to  see 
how  any  article  could  have  served  as  a  standard  unless  it  first 
served  as  a  medium  of  exchange.    Yet  this  question  we  need  not 
stop  to  consider.     At  the  present  time  the  article  which  serves 
as  a  so-called  " standard"  or  "denominator"  of  value  is  the  thing 
itself  which  possesses  universal  acceptability,  and  which  serves, 
either  by  itself  or  through  its  representatives,  as  a  medium  of 
exchange. 

5.  Money  has  a  fleet-footed  auxiliary  or  representative  in 
credit.    Much  as  the  introduction  of  money  simplified  the  prob- 
lem of  exchange,  nevertheless  its  use  in  every  purchase  or  sale 
necessitated  the  handling  and  testing  of  two  valuable  things, 
the  article  sold  and  the  money  given  in  payment.    A  man  going 
to  market  had  to  have  money  in  his  pocket.    As  the  wealth  of 
men  increased,  exchanges  grew  in  magnitude  and  the  carrying 
and  counting  of  money  became  burdensome.    Then  here  and 


4  MONEY  AND   CURRENCY 

there,  in  peaceful  and  law-abiding  communities,  men  who  had 
more  or  less  frequent  dealings  with  one  another  began  to  keep 
accounts  and  to  sell  goods  without  demanding  the  money  in 
hand,  their  balances  of  debt  and  credit  being  settled  at  some 
convenient  or  agreed-upon  time.  Thus  began  the  evolution  of 
credit,  and  in  the  process  men  were  doubtless  quite  unconscious 
of  the  almost  infinite  possibilities  of  this  new  system  of  ex- 
change. It  gave  to  money  an  unsuspected  potency  or  efficiency. 
Wherever  traders  met  there  appeared  credit,  armed  with  power 
of  attorney  for  money,  and  fully  competent,  if  its  credentials  were 
not  doubted,  to  represent  money  in  any  contract  of  exchange. 

In  the  modern  world  of  business  credit  plays  so  prominent 
a  part  in  all  buying  and  selling  that  men  often  think  and  speak 
of  it  as  an  independent  thing  or  force.  The  student,  however, 
must  never  lose  sight  of  the  relationship  between  credit  and 
money.  Credit  and  money  are  not  two  different  things  ;  credit, 
indeed,  is  not  a  thing  at  all,  but  merely  the  name  given  to  a 
common  and  important  use  of  money.  A  man  who  buys  any- 
thing with  credit  really  buys  with  money,  the  payment  merely 
being  deferred.  Leaving  barter  out  of  account,  we  may  say 
that  at  the  present  time  money  figures,  either  potentially  or 
actually,  on  one  side  or  the  other  of  every  exchange.  Credit  is 
merely  money's  representative  or  proxy. 

Broadly  defined,  credit  is  the  power  to  get  goods  in  exchange 
by  giving  a  promise  or  contract  to  deliver  an  equivalent  at  some 
future  time.  An  exchange  of  goods  against  a  promise  to  deliver 
goods  is  a  kind  of  barter  credit,  and  is  not  a  common  trans- 
action. At  the  present  time,  in  almost  all  credit  exchanges 
money  is  the  thing  promised.  Hence  credit  may  be  concretely 
defined  as  a  promise  to  pay  money. 

It  is  evident  that  credit  could  not  have  been  much  employed 
by  men  until  after  the  rights  of  property  were  respected  and 
something  resembling  the  modern  law  of  contract  was  in  force. 
A  man  will  not  part  with  the  product  of  his  labor  for  a  mere 
promise  unless  he  has  confidence  that  the  promise  will  be  kept. 
Credit  is,  therefore,  a  development  of  later  times  than  money; 
yet  the  explorer  in  Babylon  has  discovered  promissory  notes 


THE  MEDIUM   OF   EXCHANGE  5 

which  were  graven  on  tablets  in  the  days  of  Abraham,  over  two 
thousand  years  before  the  Christian  era  began.  To-day  most 
of  the  world's  exchanges  are  effected  by  means  of  credit,  and 
these  promises  to  pay  money  are  enforced  by  the  law  of  every 
civilized  land. 

6.  Credit  differs  from  money  in  that  not  all  forms  of  it  pos- 
sess an  equal  degree  of  acceptability.  A  man's  check  or  prom- 
issory note  will  be  taken  only  by  people  who  know  him  and 
trust  him,  whereas  every  one  will  accept  a  bank  note.  Some 
forms  of  credit  within  a  community  have  almost  the  same 
acceptability  as  money  itself.  For  example,  the  greenback, 
which  is  merely  the  promise  of  the  United  States  to  pay  gold, 
is  a  medium  of  exchange  quite  as  acceptable  within  the  country 
as  gold  itself.  We  divide  credit,  therefore,  into  two  classes : 
(i)  credit  of  general  acceptability,  such  as  greenbacks  and  bank 
notes ;  (2)  credit  of  limited  acceptability,  such  as  bank  checks, 
drafts,  and  promissory  notes.  Credit  of  the  first  class  is  pop- 
ularly called  money,  and  is  even  so  named  in  some  scientific 
treatises ;  in  this  book,  however,  it  will  be  designated  as  credit 
money  or  representative  money.  The  reader  should  bear  in 
.mind  that  it  is  not  money  at  all,  it  is  credit. 

In  many  countries  certain  forms  of  credit  money  have  been 
made  legal  tender,  and  on  that  account  are  prized  by  men  as 
highly  as  money  itself,  for  no  creditor  can  refuse  to  accept  them 
when  offered  by  a  debtor.  In  the  United  States,  for  instance, 
the  silver  dollar  and  greenback,  although  these  are  credit  instru- 
ments, being  the  government's  promises  to  pay  gold,  are  legal 
tender  for  the  payment  of  any  debt  calling  for  money. 

Although  the  nature  of  credit  is  simple,  its  relation  to  price 
is  not  always  perfectly  evident.  By  the  word  "price"  is  meant 
the  amount  of  money  for  which  a  thing  will  exchange.  When 
we  say  that  the  price  of  a  bushel  of  wheat  is  seventy  cents,  we 
mean  that  a  bushel  of  wheat  will  exchange  for  seventy  cents. 
If  all  exchanges  were  made  for  money,  credit  not  being  used 
in  any  form,  the  problem  of  price  would  be  comparatively 
simple;  it  would  be  perfectly  clear  that  the  price  of  wheat 
measured  the  value  or  exchange  power  of  money  with  respect 


6  MONEY  AND   CURRENCY 

to  wheat.  But  the  use  of  credit  seems  to  introduce  a  new  ele- 
ment. Some  writers  even  affirm  that  credit  is  more  important 
than  money  in  the  determination  of  price,  while  others  go  to 
the  other  extreme  and  hold  that  the  use  of  credit  has  no  effect 
whatever  on  price.  This  is  a  theoretical  question  which  we 
cannot  discuss  until  we  have  gone  more  deeply  into  the  nature 
of  both  money  and  credit. 

7.  Money  has  been  the  subject  of  innumerable  books  and 
pamphlets,  some  of  them  written  by  the  world's  greatest  think- 
ers ;  nevertheless  no  subject  in  political  economy  is  to-day  more 
fruitful  of  controversy  and  misunderstanding  among  economists, 
and  none  seems  more  cloudy  and  confused  in  the  popular  mind. 
One  cause  of  this  misunderstanding  is  the  lack  of  unanimity 
in  the  use  of  the  word  " money."  In  the  newspapers,  in  "the 
street,"  and  even  in  scientific  treatises  on  political  economy, 
we  find  the  word  used  in  widely  different  senses.  Definition  is 
essential  to  clear  thinking.  Let  us  consider,  therefore,  the  dif- 
ferent meanings  which  have  been  given  to  this  word  "  money." 

(a)  Scientific  use.    Money  is  that  thing  which  everybody  in 
a  community  desires  in  some  degree,  and  is  willing  to  take  in 
payment  for  goods  parted  with  or  for  services  rendered.    This 
is  money  in  the  scientific  sense.     It  is  sometimes  distinguished 
as  standard  or  redemption  money.    In  the  United  States,  accord- 
ing to  this  definition,  gold  coin  alone  is  money. 

(b)  Popular  use.    Money  is  popularly  used  as  a  synonym  of 
cash  or  "ready  money,"  being  applied  indiscriminately  to  all 
forms  of  currency,  such  as  gold  coin,  bank  notes,  greenbacks, 
silver  dollars,  etc.    This  is  the  most  common  use  of  the  word. 
In  this  sense  money  is  made  to  include  not  only  so-called  "stand- 
ard money,"  but  also  all  kinds  of  credit  money. 

(c)  Figurative  use.    Money  is  frequently  employed  in  general 
literature  and  in  popular  speech  as  the  equivalent  of  riches  or 
wealth ;  as  when  a  man  is  said  to  be  "  making  money,"  or  to 
have  more  money  than  he  can  spend. 

(d)  Financial  use.    Money  is  frequently  employed  as  a  syno- 
nym of  capital   or  loanable  funds;   as  "the  money  market," 
"time  money,"   "money   is   tight."    In  this  sense,   which  is 


THE  MEDIUM   OF   EXCHANGE  7 

common  in  financial  circles,  money  means  lending  power,  and  is 
more  closely  related,  as  we  shall  see  later,  to  the  savings  of  a 
community  than  to  the  amount  of  money  or  cash  in  existence.1 

(e)  Legal  use.    Among  lawyers  and  in  the  courts  money  is 
anything  the  law  declares  a  legal  tender  for  the  payment  of  a 
debt.    Thus  in  the  United  States,  bank  notes,  silver  certificates, 
and  gold  certificates,  not  being  legal  tender,  are  not  money  in 
the  legal  sense,  but  gold  coin,  silver  dollars,  and  greenbacks  are. 

(f)  Technical  use  under  National  Banking  Act.     National 
banks  in  the  United  States  are  required  by  law  to  keep  on 
hand  a  certain  amount  of  "  lawful  money  "  as  a  reserve  for  the 
protection  of  depositors.    "Lawful  money"  includes  gold  coin 
and  bullion,  gold  certificates,  silver  dollars,  silver  certificates, 
greenbacks,  and  Treasury  notes,  —  in  fact  all  kinds  of  currency 
except  bank  notes.    It  must  not  be  confused  with  legal  tender. 

(g)  Pseudo-scientific  use.    By  some  writers  money  is  made 
to  include  all  media  of  exchange,  not  only  money  and  credit 
money,  but  also  checks,  bills  of  exchange,  promissory  notes,  and 
other  forms  of  credit.    Fortunately  this  vague  use  of  the  word 
is  not  common.2 

When  we  analyze  these  various  uses  of  the  word  "  money," 
we  find  that  the  essential  element  in  them  all  is  the  idea  of 
universal  acceptability.  A  representative  of  money — that  is  to 
say,  a  promise  to  deliver  money  upon  demand  or  at  some  future 
time — may  possess  in  ordinary  transactions  all  the  acceptability 
of  money  itself,  and  may,  therefore,  popularly  be  classed  as 
money;  yet  it  is  not  money,  but  credit,  and  must  be  sharply 
distinguished  from  the  thing  it  represents.  In  this  book  the 
word  will  always  be  used  in  the  scientific  sense:  Money  is  that 
valuable  thing  or  economic  good  which  possesses  in  any  country 
or  community  universal  acceptability  as  a  medium  of  exchange 
or  means  of  payment. 

1  Money,   which    is  so   commonly   understood  as  the  synonym  of   wealth,  is 
more  especially  the  form  in  use  to  denote  it  when  borrowing  is  spoken  of.    Bor- 
rowing capital  is  universally  spoken  of  as  borrowing  money;  the  loan  market  is 
called  the  money  market ;  those  who  have  their  capital  disposable  for  investment 
are  called  the  moneyed  class.  —  J.  S.  MILL,  Political  Economy,  Book  III,  chap,  viii,  2. 

2  See  Farrer's  Studies  in  Currency,  pp.  187-189. 


8  MONEY  AND   CURRENCY 

8.  Currency  denotes  all  media  of  exchange  that  possess  uni- 
versal acceptability  within  a  country ;  it  embraces,  therefore, 
money  itself  and  credit  money,  the  latter  being  all  those  forms 
of  credit  which  possess  the  same  acceptability  or  exchange- 
ability as  the  money  which  they  promise.  Thus  in  the  United 
States  gold  alone  is  money;  United  States  notes,  bank  notes, 
silver  dollars,  and  subsidiary  coins  are  credit  money;  all  these 
lumped  together  constitute  the  country's  supply  of  currency,  or 
monetary  circulation.1 

Cash  is  practically  a  synonym  of  "  currency,"  but  is  often  used 
with  the  special  connotation  of  "  ready  money  "  as  opposed  to 
credit  of  limited  acceptability.  Cash  includes,  therefore,  both 
money  and  all  kinds  of  credit  money.  By  bankers  it  is  applied 
also  to  " exchanges  for  the  clearing  house,"-— that  is,  all  checks 
or  demand  drafts  on  other  banks,  which  are  immediately  con- 
vertible into  money  or  credit  money. 

For  convenience  of  reference  brief  definitions  of  several 
important  terms  are  here  given. 

Utility  is  want-satisfying  power.  Anything  that  is  wanted  by 
men  possesses  utility  in  the  economic  sense.  It  is  not  syn- 
onymous with  usefulness.  Many  things  much  desired  by  men, 
and  hence  possessing  great  utility,  would  not  popularly  be 
called  very  useful ;  for  instance,  diamond  scarf  pins,  cigars,  and 
silk  hats. 

Value  means  exchange  power  or  purchasing  power.  Nothing 
has  value  unless  it  has  utility  and  is  limited  in  supply.  The 
value  of  a  thing  is  shown  by  the  quantities  of  other  things  it 
commands  in  exchange.  The  greater  the  utility  of  a  thing,  — 
in  other  words,  the  stronger  the  desire  for  it,  —  the  greater  its 
value ;  the  greater  its  supply,  the  lower  its  value. 

Commodity  is  the  economist's  term  for  "thing."  As  econo- 
mists are  not  interested  in  things  that  do  not  satisfy  wants,  only 

1  The  so-called  "  supply  of  money  "  in  the  United  States,  as  estimated  period- 
ically by  the  Secretary  of  the  Treasury,  includes  credit  money  as  well  as  money, 
and  might  better  be  called  the  "supply  of  currency."  On  July  i,  1905,  the  supply 
of,"  money"  in  circulation  was  estimated  to  be  $2,597,000,000,  but  of  this  amount 
only  about  $1,150,000,000,  which  was  the  estimated  amount  of  gold  in  the  country 
available  for  use  as  money,  could  properly  be  called  money. 


THE  MEDIUM   OF   EXCHANGE  9 

such  articles  as  possess  either  utility  or  value  can  properly  be 
called  commodities. 

Good  is  a  synonym  of  "  commodity,"  and  in  recent  economic 
literature  is  more  often  used  than  "  commodity." 

A.  free  good  is  one  supplied  in  such  abundance  that  it  has  no 
value  and  commands  no  price,  such  as  air  and  water.  A  free 
good  possesses  utility,  but  not  value. 

An  economic  good  is  one  of  which  the  supply  is  less  than  the 
demand.  It  has  both  utility  and  value,  and  includes  all  articles 
that  are  bought  and  sold  in  the  markets,  or  for  which  men  are 
willing  to  toil. 

Money  is  anything  which  all  persons  in  a  community  or  coun- 
try are  willing  to  take  in  final  payment  for  goods  or  services. 

Price  is  the  amount  of  money  a  given  commodity  will  ex- 
change for.  It  expresses,  therefore,  the  value  of  a  commodity 
with  respect  to  money. 

Credit  is  the  power  to  obtain  goods  or  services  by  giving  a 
promise  to  pay  money  on  demand  or  at  a  specified  date  in  the 
future. 

A  credit  instrument  is  an  unconditional  promise  or  contract 
to  pay  money  on  demand  or  at  a  specified  date  in  the  future. 

Credit  money  is  any  form  of  credit  which  possesses  within  a 
country  or  community  the  same  acceptability  as  money  itself. 
It  is  often  called  "  representative  money,"  and  sometimes  "fidu- 
ciary money." 

Currency  includes  both  money  and  credit  money. 

Cash,  like  currency,  includes  both  money  and  credit  money, 
but  puts  special  emphasis  on  their  immediate  and  general 
acceptability. 

Monetary  circulation  is  a  phrase  commonly  used  to  cover  all 
forms  of  currency,  —  that  is,  money  and  credit  money. 

Legal  tender  includes  money  and  all  forms  of  credit  money 
that  the  law  compels  creditors  to  accept. 

Barter  is  an  exchange  of  goods  without  the  use  either  of 
money  or  of  a  promise  to  pay  money.  It  is  often  described  as 
an  exchange  of  goods  for  goods,  but  this  definition  lacks  preci- 
sion, for  money  is  itself  a  good. 


10  MONEY  AND   CURRENCY 

9.  Since  all  goods  at  the  present  time  are  made  to  be  sold, 
and  are  sold  for  money  in  hand  or  for  credit,  which  calls  for 
money  in  the  future,  men  easily  get  into  the  habit  of  regarding 
money  as  the  symbol  and  representative  of  universal  wealth. 
Capital  goods  are  always  spoken  of  in  terms  of  money.  Wages 
and  salaries  and  all  incomes  are  paid  in  money  or  credit.  The 
average  producer  of  wealth  is  much  less  concerned  about  the 
quantity  of  wealth  he  produces  than  about  the  amount  of  money 
he  gets  for  it.  Profit,  which  is  the  incentive  to  business  activity, 
is  the  excess  of  money  income  over  money  outgo ;  like  price, 
it  is  a  money  item.  Commodities,  those  economic  goods  which 
are  the  real  objects  of  human  desire,  apparently  occupy  a  sec- 
ondary place  in  the  business  world,  for  in  the  conscious  pur- 
poses and  desires  of  men  money  is  the  primary  thing.  For  this 
and  other  reasons,  as  will  be  shown  in  the  subsequent  chapters, 
"  price  "  and  "  profit "  are  the  two  most  important  words  in  the 
lexicon  of  political  economy.  The  main  purpose  of  this  book  is 
to  show  how  the  prices  of  commodities  and  the  profits  of  busi- 
ness (including  the  wages  of  workingmen)  are  dependent  upon 
the  laws  governing  the  value  of  money. 

LITERATURE 

The  following  are  among  the  best  works  on  money  in  the  English 
language  :  HORACE  WHITE,  Money  and  Banking  (Boston,  1902)  ;  F.  A. 
WALKER,  Money  (New  York,  1891);  W.  S.  JEVONS,  Money  and  the 
Mechanism  of  Exchange  (New  York,  1880);  and  Investigations  in  Cur- 
rency and  Finance  (London,  1884)  ;  J.  S.  NICHOLSON,  Money  and  Mone- 
tary Problems  (London,  1895)  ;  DAVID  KINLEY,  Money  (New  York,  1904) ; 
J.  LAURENCE  LAUGHLIN,  The  Principles  of  Money  (New  York,  1903)  ; 
C.  A.  CON  ANT,  Principles  of  Money  and  Banking  (New  York,  1906). 

The  reader  will  get  help  from  any  one  of  the  following  general  works 
on  political  economy:  JOHN  STUART  MILL,  The  Principles  of  Political 
Economy;  DAVID  RICARDO,  Political  Economy ;  HENRY  R.  SEAGER, 
Introduction  to  Economics;  N.  G.  PIERSON,  Principles  of  Economics 
(translated  from  the  Dutch,  London,  1902)  ;  FRANK  FETTER,  The  Prin- 
ciples of  Economics  ;  C.  J.  BULLOCK,  Introduction  to  the  Study  of  Eco- 
nomics; ARTHUR  T.  HADLEY,  Economics;  CHARLES  GIDE,  Principles  of 
Political  Economy  (from  the  French,  Boston,  1904)  ;  E.  R.  A.  SELIGMAN, 
Political  Economy  (New  York,  1906). 


CHAPTER  II 

V 

NATURE  AND  VALUE  OF  MONEY 

10.  Exchangeability  is  the  only  utility  of  money,  n.  Money  is  the  standard 
of  prices,  and  is  itself  without  price.  12.  Significance  of  the  expression  "  measure 
of  value,"  or  "standard  of  value."  13.  Money  as  a  standard  of  deferred  payment. 
14.  Money  as  a  store  of  value.  15.  Under  normal  conditions  money  is  never  idle. 
1 6.  The  value  of  money  is  revealed  by  general  prices.  17.  The  value  of  money 
depends  on  demand  and  supply.  18.  The  demand  for  money  is  the  need  for 
utility  possessing  universal  exchangeability.  1 9.  The  demand  for  money  is  limited 
and  definite.  Two  misconceptions.  20.  The  demand  for  money  is  measured  by 
the  amount  needed  to  make  exchanges  and  to  serve  as  a  store  of  value.  21.  Credit 
lessens  the  demand  for  money.  22.  By  supply  of  money  is  meant  the  number  of 
money  units  available  for  use  as  a  medium  of  exchange  or  store  of  value.  23.  Dis- 
tinction between  the  supply  of  money  units  and  the  supply  of  money  utility  or  of 
money  value.  24.  The  supply  of  money  value  is  the  product  of  the  demand  for 
money,  and  is  independent  of  the  supply  of  money.  25.  The  supply  of  money 
utility  always  tends  to  equal  the  demand.  26.  The  price  of  a  commodity  varies 
because  of  changes  either  in  the  value  of  the  commodity  itself  or  in  the  value  of 
money.  27.  Two  kinds  of  money  with  which  the  world  has  had  experience  :  com- 
modity money  and  fiat  money. 

10.  Exchangeability  is  the  only  utility  possessed  by  money, 
and  it  is  on  account  of  this  utility,  and  this  only,  that  it  is 
wanted.  Money  performs  a  specific  service  for  men,  like  a  hoe 
or  a  knife,  and  is  wanted  for  no  other  purpose. 

Since,  however,  all  forms  of  wealth  can  be  obtained  in 
exchange  for  money,  or  for  a  promise  to  pay  money,  and  are 
usually  obtained  in  that  way,  men  have  got  into  the  habit 
of  regarding  money  as  a  mysterious  thing,  —  a  sort  of  symbol  of 
values,  an  omnipotent  "  third  commodity," — the  possession  of 
which  gives  them  command  over  all  comforts  and  luxuries ;  and 
they  cannot  easily  think  of  it  as  a  simple  tool  which  they  want 
for  a  single  service.  Yet  the  only  service  that  money  performs 
and  all  the  advantages  that  flow  from  its  use  are  due  to  its 
exchangeability.  As  a  carpenter  wants  saws,  hammers,  and 
nails  to  build  a  house  with,  so  a  man  wants  money  to  make 


12  MONEY  AND  CURRENCY 

exchanges  with.  Money  differs  from  other  tools  only  in  the 
fact  that  every  man  has  occasion  to  use  it. 

ii.  Money  is  the  standard  of  prices.  By  price  is  meant  the 
amount  of  money  a  thing  will  exchange  for.  It  is  sometimes 
confused  with  value,  but  that  word  has  a  much  broader  signifi- 
cance. By  the  value  of  an  article  is  meant  the  amount  of  goods 
in  general  for  which  it  will  exchange, —  in  other  words,  its  pur- 
chasing power,  or  the  exchange  relation  it  bears  to  all  other 
goods.  Value  is  a  general  concept ;  price  is  concrete.  To  get 
an  idea  of  the  value  of  a  bushel  of  wheat,  we  must  know  for 
what  quantities  of  goods  in  general  it  can  be  exchanged,  —  that 
is  to  say,  its  exchange  relation  with  corn,  wool,  iron,  copper, 
cloth,  and  so  on  through  the  list  of  all  goods,  including  money. 
The  price  of  a  commodity  gives  merely  its  exchange  relation 
with  the  single  good,  money.1 

Money  itself  has  no  price.  This  is  self-evident,  for  a  thing 
cannot  be  exchanged  for  itself.  In  any  country  where  gold  is 
freely  coined  into  money,  gold  cannot  properly  be  said  to  have 
any  price.  Gold  is  practically  the  money  of  such  a  country,  for 
the  value  of  a  gold  coin  cannot  differ  much  from  that  of  the 
bullion  it  contains.  In  the  United  States  it  is  customary  to 
speak  of  $20.67  as  tne  price  of  an  ounce  of  gold,  for  that  is  the 
sum  of  money  into  which  an  ounce  of  gold  is  coinable.  Price  is 
here  incorrectly  used.  The  expression  "  mint  price,"  which  is 
often  employed,  is  less  likely  to  produce  confusion.  It  is  nearer 
the  truth  to  say  that  an  ounce  of  pure  gold  is  $20.67,  f°r  the 
two  things  are  practically  identical  except  in  form,  the  one 
being  an  ounce  of  gold  coined,  the  other  an  ounce  of  gold 
uncoined.  The  one  cannot  in  the  ordinary  sense  of  the  word 
be  the  price  of  the  other.2 

1  Many  economists  have  defined  price  as  being  the  amount  of  any  single  good 
for  which  another  good  will  exchange.    According  to  this  definition,  if  a  bushel  of 
wheat  can  be  exchanged  for  two  of  corn,  the  price  of  one  bushel  of  wheat  would 
be  two  of  corn.    Price  is  never  used  in  this  sense  in  everyday  life. 

2  In  the  United  States  statutes,  the  only  place  where  an  authoritative  definition 
of  "  dollar  "  can  be  found,  it  is  defined  as  a  coin  containing  25.8  grains  of  standard 
gold.    Since  standard  gold  is  nine  tenths  fine,  the  dollar  contains  23.22  grains  of 
pure  gold.    The  silver  dollar  is  incorrectly  called  "  a  standard  dollar  "  in  the  law 
of  1878.    Silver  is  not  freely  coined,  and  silver  dollars  therefore  are  not  money. 


NATURE  AND  VALUE   OF   MONEY  13 

MONEY  is  THE  STANDARD  OF  PRICES 

12.  The  use  of  money  as  a  medium  of  exchange  enables  men 
to  compare  the  contemporaneous  values  of  goods,  and  hence  it 
is  often  called  the  standard  or  measure  of  value.  Since  all 
things  are  sold  either  for  money  or  its  equivalent,  —  a  promise 
to  pay  money,  —  we  are  able  by  comparing  the  prices  of  different 
things  at  any  time  to  compare  their  values.  Thus,  if  we  know 
that  wheat  sells  at  eighty  cents  a  bushel  and  corn  at  forty 
cents,  we  know  that  the  value  of  wheat  is  twice  that  of  corn. 
Money  is  a  sort  of  common  denominator  to  which  each  day  the 
values  of  all  other  things  are  reduced  through  the  medium  of 
price.  We  compare  the  wealth  of  individuals  in  the  same  way, 
involuntarily  making  an  estimate  of  the  sums  of  money  for 
which  their  respective  properties  would  sell. 

The  expression  "  standard  of  value"  is  easily  susceptible  of 
an  interpretation  much  too  broad  and  general.  The  use  of 
money  enables  us  to  compare  the  values  of  goods  only  at  a 
given  time.  It  is  a  mistake  to  assume,  as  is  often  dime,  that 
money  is  a  permanent,  changeless  standard  adapted  to  the 
measurement  or  comparison  of  values  over  long  periods  of 
time ;  this  it  is  not  and  cannot  be  so  long  as  its  own  value  is 
subject  to  change.  The  world  has  never  used  a  money  which 
did  not  change  in  value  from  year  to  year.  The  value  of  gold, 
for  example,  was  much  greater  in  1890  than  in  1870,  and  con- 
sequently the  gold  prices  of  most  things  were  lower.  The  fall 
of  prices  during  that  period  was  evidence  not  of  a  fall  in  the 
values  of  all  commodities,  as  was  frequently  assumed,  but  of  a 
rise  in  the  value  of  gold.  Indeed,  a  general  rise  or  fall  in  the 
values  of  all  commodities  is  impossible,  for  if  the  values  of 
some  increase,  the  values  of  others  must  necessarily  decline. 
All  prices  may  rise  or  fall,  for  the  purchasing  power  of  a  money 
may  change ;  but  the  purchasing  power  of  all  commodities  evi- 
dently cannot  increase  at  the  same  time.  Simple  as  this  propo- 
sition is,  it  is  sometimes  overlooked  by  writers  upon  money. 

Money  serves  merely  as  a  medium  of  exchange,  and  so 
becomes  the  standard  of  prices  and  convenient  measure  of 


14  MONEY  AND   CURRENCY 

contemporaneous  values.  It  is  price,  the  outcome  of  money's 
service  as  a  medium  of  exchange,  which  enables  us  at  any  one 
time  to  compare  the  values  of  goods.  When  we  speak  of  money 
as  a  standard  of  value  we  mean  money  as  a  standard  of  prices, 
and  nothing  more.  After  we  have  analyzed  the  value  of  money 
and  found  upon  what  circumstances  it  depends,  we  shall  be 
ready  to  consider  the  influence  exerted  upon  business  by  gen- 
eral price  changes  or  by  changes  in  the  value  of  what  is  com- 
monly called  the  standard.  Controversy  has  raged  about  this 
subject,  and  there  is  nothing  in  the  whole  field  of  finance  more 
important. 

13.  Since  credit  instruments  of  all  kinds,  including  those 
calling  for  payment  after  a  term  of  years,  are  usually  promises 
to  pay  money,  money  is  sometimes  called  a  standard  of  deferred 
payments.    This  expression  means  that  men  not  only  use  money 
as  a  medium  of  exchange  in  the  present,  but  also  agree  to  use 
it  in  the  future.    To  say  that  money  is  a  standard  of  deferred 
payments  is  equivalent  to  saying  that  long-time  credit  instru- 
ments are  usually  written  in  terms  of  money.    This  fact  sets 
forth  no  new  service  performed  by  money.    Money's  o"ne  func- 
tion is  to  serve  as  a  medium  of  exchange.    Universal  exchange- 
ability is  the  only  utility  which  it  possesses.    On  account  of 
this  utility  it  fixes  prices  in  the  present  and  is  employed  by 
men  as  the  price  maker  in  contracts  calling  for  future  delivery. 
The  reader  must  not  infer  that  the  use  of  money  in  such  con- 
tracts is  not  of  importance.    On  the  contrary,  the  fact  that  the 
money  of  to-day  is  expected  to  serve  as  a  means  of  payment  or 
means   of  exchange  ten   or  twenty  years  hence  is  of   great 
importance.    We  shall  consider  this  use  of  money  in  Chapter 
VIII,  —  The  Importance  of  Price. 

MONEY  AS  A  STORE  OF  VALUE 

14.  Since  men  find  it  convenient  to  keep  in  hand  a  certain 
amount  of  their  wealth  in  the  form  of  money,  because  of  their 
need  for  a  medium  of  exchange  in  the  present  and  in  the  near 
future,  money  is  said  to  serve  as  a  store  of  value.    Writers 


NATURE  AND  VALUE  OF   MONEY  15 

upon  money  usually  say  that  money  has  four  functions  ;  that  it 
serves  as  a  medium  of  exchange,  as  a  standard  of  value,  as  a 
standard  of  deferred  payments,  and  as  a  store  of  value.  We 
have  already  discussed  the  first  three  of  these  functions  and 
have  seen  that  they  are  all  resolvable  into  the  one  function  of 
money  as  a  medium  of  exchange.  We  shall  find  upon  analysis 
that  the  use  of  money  as  a  store  of  value  also  grows  out  of  its 
use  as  a  medium  of  exchange. 

As  a  rule,  men  keep  on  hand  or  in  store  only  as  much  money 
as  they  expect  to  have  use  for  in  the  immediate  future.  This 
amount  varies  with  different  men  according  to  their  means,  the 
nature  of  their  business,  their  distance  from  banks,  and  their 
habits  in  the  use  of  checks.  If  a  man  finds  he  has  more  money 
on  hand  than  he  has  immediate  use  for,  he  deposits  it  in  a  bank 
at  interest,  or  he  makes  some  investment  with  it.  He  gains 
nothing  by  keeping  it.  To  make  a  profit  out  of  it  he  must 
either  lend  it  or  convert  it  into  other  goods.  Money,  if  lost  or 
stolen,  is  more  difficult  to  recover  than  any  other  property.  All 
dollars  are  so  much  alike  that  identification  is  practically  impos- 
sible. For  these  reasons  money  does  not  make  so  good  a  store 
of  value  as  some  other  kinds  of  wealth;  stocks,  bonds,  real 
estate,  or  even  perishable  commodities  like  wheat  and  cotton 
serve  this  purpose  much  better.  Therefore  men  store  in  money 
only  that  part  of  their  wealth  which  they  expect  to  have  occa- 
sion to  use  as  a  medium  of  exchange;  the  rest  they  keep  in 
forms  that  will  yield  an  income  or  in  other  ways  give  them 
satisfaction. 

While  money  does  not  at  the  present  time  perform  any 
unique  service  as  a  store  of  value,  there  is  no  doubt  that  it  did 
several  centuries  ago,  when  the  rights  of  property  were  less 
secure.  During  the  Middle  Ages  men  often  found  it  advisable 
to  conceal  the  amount  of  their  property  from  the  taxgatherer 
or  from  their  feudal  lord,  and  so  converted  their  surplus  wealth 
into  the  precious  metals,  which  they  buried  in  the  ground. 
Even  to-day,  in  such  countries  as  India  and  China,  the  natives 
have  the  habit  of  hoarding  much  of  their  wealth  in  the  form 
of  money,  having  little  knowledge  of  investment  and  being 


16  MONEY  AND   CURRENCY 

fearful  of  robbery.  But  in  all  civilized  countries  the  practice  of 
hoarding  money  has  ceased.  The  miser  who  gloats  over  glitter- 
ing coin  belongs  to  fable  and  tradition.  The  twentieth-century 
miser  gloats  over  stocks,  bonds,  mortgages,  and  warranty  deeds. 

The  fact  that  banks  keep  large  amounts  of  money  on  hand  is 
doubtless  responsible  for  the  idea  that  money  still  performs  a 
peculiar  service  as  a  store  of  value.  This  practice  on  the  part  of 
banks,  however,  forms  no  exception  to  the  rule.  A  bank  keeps 
money  on  hand  because  it  is  a  dealer  in  promises  to  pay  money 
and  must  always  be  able  to  redeem  these  promises.  It  is  be- 
cause money  is  universally  acceptable  as  a  means  of  payment  that 
bank  reserves  are  maintained.  If  a  bank  has  more  money  than 
it  can  lend,  or  more  than  is  necessary  in  the  opinion  of  its  man- 
agers to  meet  the  demands  of  its  depositors,  it  is  under  the 
same  inducement  as  a  private  person  to  get  rid  of  the  surplus. 

Thus  we  see  that  the  service  of  money  as  a  store  of  value  is 
not  one  of  its  unique  functions.  The  farmer  has  value  stored  up 
in  a  plow,  in  a  threshing  machine,  in  a  rake,  in  hay  and  grain, 
because  he  knows  he  will  have  occasion  for  the  use  of  wealth 
in  these  forms.  For  the  same  reason  the  banker  stores  value  in 
the  form  of  money.  The  only  thing  peculiar  about  money  is 
the  fact  that  every  man  has  occasion  for  using  it,  and  so  every 
man,  if  he  has  any  wealth  at  all,  is  likely  to  keep  some  portion 
of  it  stored  in  the  shape  of  money. 

15.  Owing  to  the  nature  of  its  single  utility,  exchangeability, 
money  seeks  constant  employment,  and  under  normal  condi- 
tions is  never  idle.  In  this  respect  it  is  unlike  every  other 
good.  Idle  money  is  an  abnormal  thing.  Men  frequently  hold 
wheat  and  other  goods  back  from  the  market  in  the  hope  of  get- 
ting a  higher  price.  But  money  has  no  price,  and  the  business 
man  sees  no  chance  of  making  a  profit  by  holding  it.  Indeed, 
even  when  money  is  rising  in  value,  that  is  to  say  when  gen- 
eral prices  are  falling,  a  man  who  has  money  can  do  something 
better  than  keep  it  idle  in  his  safe.  It  would  not  pay  him  then 
to  exchange  the  money  for  goods,  for  he  would  have  to  sell 
them  at  lower  prices  than  he  had  paid,  but  he  can  make  a 
profit  by  loaning  the  money  or  by  buying  mortgages  or  bonds, 


NATURE  AND  VALUE  OF   MONEY  17 

for  later  he  will  get  back  the  principal  augmented  by  interest. 
Business  men,  therefore,  keep  in  their  possession  only  that 
amount  of  money  for  which  they  expect  to  have  immediate  use. 
Banks  with  their  large  stores  of  money  constitute  no  exception. 
When  a  bank  has  in  its  vaults  more  money  than  is  needed  as  a 
reserve,  it  looks  far  and  near  for  good  paper  in  which  to  invest, 
and  often  lowers  its  rate  of  discount  in  order  to  tempt  bor- 
rowers. So  it  happens  that  under  normal  conditions  all  the 
money  in  a  country  is  ever  busy  doing  its  work  as  a  medium 
of  exchange  and  as  a  basis  for  credit  operations.  The  existence 
of  any  large  supply  not  employed  in  one  of  these  two  ways  is 
certain  evidence  either  of  industrial  and  financial  derangement 
or  of  unscientific  and  restrictive  legislation. 

THE  LAW  OF  VALUE 

1 6.  The  value  of  money  is  revealed  by  general  prices.  It  is 
clear  that  the  value  of  money  with  respect  to  a  single  com- 
modity, like  wheat  for  example,  is  shown  by  the  price  of  wheat. 
A  rise  of  the  price  of  wheat  means  that  the  value  of  money 
with  respect  to  wheat  has  fallen.  When  wheat  is  one  dollar  a 
bushel  the  value  of  money  in  respect  to  wheat  is  just  twice 
what  it  is  when  wheat  is  selling  for  two  dollars  a  bushel.  In 
the  latter  case  a  dollar  is  worth  only  half  a  bushel  of  wheat. 
In  the  same  way  with  respect  to  all  commodities,  —  the  value  of 
money  rises  as  their  prices  fall,  and  falls  as  their  prices  rise. 
Thus  general  prices  furnish  an  index  to  the  value  of  money ; 
rising  prices  of  goods  show  that  the  value  of  money  is  falling, 
and  falling  prices  show  that  the  value  of  money  is  rising.  In 
order  to  give  concreteness  to  the  vague  expression  "general 
prices,"  statisticians  construct  what  is  commonly  known  as  an 
index  number.  In  its  simplest  form  an  index  number  is  the 
average  of  the  prices  of  a  group  of  important  commodities;  a 
rise  of  this  average  shows  a  decline  in  the  purchasing  power 
of  money  with  respect  to  the  commodities.  The  commodities 
chosen  are  assumed  to  be  representative  of  all  commodities, 
and  hence  it  is  inferred  that  the  value  of  money  is  falling  when 


l8  MONEY  AND   CURRENCY 

the  index  number  is  rising,  and  increasing  when  the  index 
number  is  declining.  The  uses  and  defects  of  the  index  number 
are  discussed  in  Chapter  VI. 

17.  The  value  of  money  depends  on  the  demand  for  and  the 
supply  of  money.  In  order  to  account  for  the  value  of  money 
it  is  not  necessary  to  invent  any  new  law  or  theory  of  value. 
The  value  of  any  article  depends  upon  its  utility,  i.e.  upon 
the  intensity  of  the  human  need  for  it,  and  upon  the  limita- 
tion of  the  supply.1  Money  is  no  exception  to  the  general  law 
of  demand  and  supply.  The  value  of  a  piece  of  money,  like  the 
value  of  a  bushel  of  wheat,  a  diamond,  a  horse,  or  a  saw, 
depends  upon  the  intensity  of  the  human  want  it  satisfies,  and 
that  varies  as  the  supply  of  money  varies. 

If  all  buying  were  done  with  money  in  hand,  no  form  of 
credit  being  used,  an  increase  in  the  supply  of  money  would 
tend  to  cause  a  proportionate  decrease  in  its  value  per  unit 
(unless  some  of  the  new  money  were  hoarded  or  in  other  ways 
withheld  from  use),  for  more  money  would  be  offered  for  goods 
and  sellers  would  be  able  to  get  higher  prices.  Thus,  if  no 
credit  were  used,  an  addition  of  10  per  cent  to  the  money  supply 

1  The  refinements  of  economists  with  regard  to  what  they  term  "  marginal 
utility  "  and  the  "  law  of  cost "  do  not  affect  the  truth  of  the  law  of  demand  and 
supply,  with  which  every  business  man  is  familiar.  It  is  not  necessary  here  to 
analyze  in  detail  the  various  theories  of  value.  The  reader  will  find,  if  he  study 
them  in  the  text-books  of  political  economy,  that  all  are  reducible  to  the  simple 
propositions  of  the  familiar  law  of  demand  and  supply.  The  concept  of  marginal 
utility,  for  example,  brings  into  clear  view  the  reasons  why  the  demand  for  an 
article  necessarily  varies  as  the  available  supply  of  it  is  increased  or  diminished ; 
it  gives  us  what  may  be  called  the  consumer's  view  or  theory  of  value.  If,  on  the 
other  hand,  we  study  value  from  the  producer's  point  of  view,  we  discover  that  in 
the  case  of  all  goods  produced  under  a  condition  of  free  competition  the  supply 
will  be  so  regulated  that  value  in  the  long  run  will  tend  to  coincide  with  cost.  But 
neither  of  these  views  or  theories  is  antagonistic  to  what  may  be  called  the  trader's 
or  observer's  theory  or  conclusion,  to  wit :  that  value  depends  on  demand  and 
supply.  The  marginal-utility  theorist  emphasizes  the  effect  of  changes  in  the 
demand  ;  the  cost  theorist  emphasizes  the  effect  of  influences  acting  on  the  supply. 
The  student  of  money  need  not  puzzle  over  the  subtleties  of  these  theories.  The 
law  of  demand  and  supply  explains  value  phenomena,  just  as  the  law  of  gravita- 
tion explains  physical  phenomena.  Both  are  inductions  born  of  observation,  and 
each  suggests  very  difficult  problems,  one  for  the  physicist  and  chemist,  the  other 
for  the  economist  and  psychologist. 


NATURE  AND  VALUE  OF  MONEY  19 

of  a  country  would  tend  to  raise  prices  10  per  cent.  We  cannot 
say  more  than  "tend,"  for  we  do  not  know  that  the  demand 
for  money  would  not  also  increase  the  moment  prices  began  to 
rise.  If  men,  as  a  result  of  the  rising  prices,  began  to  sell  more 
goods,  then  the  demand  or  need  for  money  would  increase,  so 
that  the  addition  to  the  supply  of  money  would  not  at  once 
exert  a  proportionate  influence  on  its  value.  In  a  state  of  society 
where  credit  is  used,  an  increase  of  the  money  supply,  as  will 
be  shown  later,  may  cause  a  rise  of  prices  out  of  proportion  to 
the  increase. 


NATURE  AND  MEASURE  OF  DEMAND 

1 8.  By  the  demand  for  money  in  a  country  is  meant  the 
general  need  or  desire  in  that  country  for  utility  in  a  form  pos- 
sessing universal  and  immediate  acceptability.     This  evidently 
depends  upon  the  volume  of  business  transactions,  upon  the 
population  of  the  country,  the  quantities  of  goods  they  produce 
and  exchange,  their  customs  with  regard  to  the  use  of  credit 
as  a  medium  of  exchange,  their  business  organization,  their 
methods  of  production  and  exchange,  and   their  habits  with 
regard  to  the  keeping  of  sums  of  money  oa  hand.    In  the  same 
way  the  demand  for  wheat  is  the  desire  or  need  for  a  food 
utility  of  the  kind  possessed  by  wheat ;  and  its  intensity  depends 
on  the  number  of  people,  on  their  wealth  or  productive  capacity, 
on  their  use  of  other  articles  possessing  food  utility,  and  on  the 
amount  of  wheat  they  are  in  the  habit  of  storing  for  future  use. 
As  the  supply  of  wheat  increases,  other  things  remaining  un- 
changed, the  value  of  a  bushel  of  wheat  declines.    In  the  same 
way  and  for  the  same  reason  the  value  of  each  piece  of  money 
falls  as  the  total  supply  of  money  increases. 

19.  The  demand  for  money  is  limited  and  definite,  like  the 
demand  for  any  other  good.    The  theory  of  money  has  been  so 
much  clouded  by  vague  conceptions  of  the  nature  of  demand 
that  some  writers  reject  altogether  the  theory  that  the  value  of 
money  is  determined  by  demand  and  supply.     Other  writers, 
particularly  those. who  have  urged  a  return  to  the  free  coinage 


20  MONEY  AND   CURRENCY 

of  silver,  have  with  much  show  of  authority  attributed  to  demand 
a  meaning  that  gives  to  certain  gross  fallacies  the  semblance  of 
demonstrated  truth.  It  is  very  important,  therefore,  that  the 
reader  should  get  at  the  outset  a  clear  idea  of  what  is  meant 
by  this  word  "demand." 

Two  common  misconceptions  need  to  be  cleared  away.  The 
first  is  the  notion  that  the  demand  for  money  consists  of  all  the 
goods  on  the  market,  and  therefore  is  indefinitely  great.  For 
the  prevalence  of  this  notion  John  Locke  and  John  Stuart  Mill 
are  in  some  degree  responsible.  Locke  held  that  money  differs 
from  other  things  in  that  the  "vent"  for  it  is  not  definite  but 
measureless.1  Mr.  Mill  conveys  the  same  idea  in  the  following  : 

The  demand  for  money,  again,  consists  of  all  the  goods  offered  for  sale. 
Every  seller  of  goods  is  a  buyer  of  money,  and  the  goods  he  brings  with  him 
constitute  his  demand.  The  demand  for  money  differs  from  the  demand  for 
other  things  in  this,  that  it  is  limited  only  by  the  means  of  the  purchaser. 
The  demand  for  other  things  is  for  so  much  and  no  more,  but  there  is  always 
a  demand  for  as  much  money  as  can  be  got.  —  Political  Economy,  Book  III, 
chap,  viii,  2. 

Mr.  Mill  here  had  in  mind  the  possible  or  potential  demand 
for  money,  not  the  real  or  effective  demand.  His  statement  is 
true  only  in  a  general  sense.  Goods  on  the  market  are  there 
to  be  sold,  and  their  owners  want  to  sell  them  for  money,  but 
no  need  for  money  arises  until  buyers  have  been  found.  The 
retailer  with  a  stock  of  goods  worth  $10,000  may  give  rise  to 
a  demand  for  no  more  money  than  one  whose  stock  is  worth 
only  $1000,  for  he  may  sell  no  more  goods.  The  demand  for 
money  is  not  fixed  by  the  quantity  of  goods  offered  but  by  the 
quantity  sold. 

Another  misconception  of  demand  is  born  of  the  popular 
confusion  of  money  with  wealth  in  general.  On  account  of  its 
constant  and  universal  use  and  its  easy  convertibility  into 
other  forms  of  wealth,  money  possesses  a  peculiar  fascination 
for  men.  The  poor  man  thinks  of  his  needs  in  terms  of  dollars 
and  cents,  and  is  sure  he  wants  all  the  money  he  can  get.  The 

1  See  Locke's  essay  entitled  "  Some  Considerations  of  the  Consequences  of  the 
Lowering  of  Interest,  etc." 


NATURE  AND  VALUE  OF   MONEY  2I 

statement  that  his  economic  need  or  real  demand  for  money  is 
no  greater  than  his  need  for  the  tools  which  he  uses  in  his 
daily  toil  would  be  to  him  at  first  incomprehensible.  Very  few 
men  have  all  the  good  things  of  earth  they  want,  and  these 
things  can  be  bought  with  money.  They  think  it  is  money 
they  need,  whereas  what  they  really  want  is  better  houses, 
better  clothing,  more  comforts,  and  more  luxuries.  Writers 
upon  money  are  not  without  responsibility  for  the  vagueness  of 
popular  ideas  on  this  subject.  For  example,  Professor  Smart 
speaks  of  money  as  "the  one  thing  of  which  nobody  ever  has 
enough,  for  in  promise  and  potency  it  is  almost  everything 
else."1  The  thing  of  which  nobody  ever  has  enough  is  wealth 
in  general.  Money,  instead  of  being  the  one  thing  of  which 
we  never  have  enough,  is  the  one  form  of  wealth  which  lies 
heaviest  on  our  hands  and  which  we  are  the  most  anxious  to  be 
rid  of.  Indeed,  the  only  intelligent  thing  to  do  with  money  is 
to  part  with  it.  Any  other  use  of  it  is  wasteful.  There  are,  of 
course,  foolish  ways  of  getting  rid  of  it,  and  wise  ways ;  but  to 
be  got  rid  of  by  exchange — that  is  the  mission  of  money.  For 
a  man  to  have  money  about  him  which  he  does  not  use  or 
expect  to  use,  is  as  uneconomic  and  extravagant  as  it  would  be 
for  a  man  who  is  afraid  of  powder  to  own  a  gun. 

The  mere  desire  for  money,  or  for  wealth  in  general,  is  no 
part  of  that  demand  for  money  which  is  responsible  for  its 
value.  No  matter  how  strong  may  be  the  desire  for  money,  if 
the  desire  leads  to  no  exchange,  and  so  does  not  call  for  the 
use  of  money,  it  is  no  part  of  the  economic  demand  for  it. 
The  demand  for  money  comes  only  from  those  persons  who 
have  wealth  or  services  which  they  wish  to  exchange.  The 
man  who  has  no  horse  has  no  need  for  a  harness ;  in  the  same 
way  the  man  who  has  no  wealth  or  services  to  sell,  has  no 
economic  need  of  money  and  plays  no  part  whatever  in  the 
demand  for  it. 

The  notion  that  money  is  the  essence  of  all  wealth,  and  that 
an  excessive  supply  is  inconceivable,  was  exemplified  in  the 
sixteenth  and  seventeenth  centuries  by  the  struggle  made  by 

^•Studies  in  Economics,  p.  145. 


22  MONEY  AND   CURRENCY 

the  nations  of  Europe  to  get  possession  of  the  precious  metals. 
It  was  then  commonly  believed  that  a  country's  wealth  was 
measured  by  the  amount  of  money  it  possessed.  Hence  nations 
deliberately  sought  to  adopt  policies  of  trade  which  would 
increase  their  store  of  the  precious  metals.  They  imposed 
heavy  fines  upon  the  export  of  gold  and  silver,  and  sought  by 
means  of  protective  tariffs  to  discourage  the  importation  of 
commodities  in  order  that  a  "  favorable  balance"  of  trade  might 
bring  the  precious  metals  to  their  treasuries.  This  is  now 
known  as  the  mercantilist  policy,  and  is  recognized,  as  between 
nations,  to  have  been  founded  upon  a  fallacy.  Gold  and  silver 
are  no  longer  regarded  as  the  main,  or  most  useful  forms  of 
wealth,  nor  does  any  nation  consciously  adopt  any  policy  in- 
tended to  bring  them  into  its  possession.  A  country  needs  a 
certain  quantity  of  the  precious  metals  for  use  in  the  arts  and 
for  use  as  money.  Any  additional  quantity,  if  it  is  not  hoarded 
as  an  idle  and  useless  surplus,  will  merely  lift  the  prices  of  goods 
to  an  abnormal  level. 

20.  The  demand  for  money  is  measured  by  the  amount 
needed  to  make  exchanges  and  to  serve  as  a  store  of  value  for 
use  in  future  exchanges.  We  cannot  measure  the  intensity  of 
any  human  want  subjectively.  We  can  estimate  its  strength 
only  by  the  activities  to  which  it  leads.  We  do  not  know  how 
hungry  a  man  is  until  we  know  how  much  he  can  eat.  We 
measure  a  horse's  thirst  by  the  amount  of  water  he  drinks.  In 
the  same  way  we  can  measure  the  demand  or  need  for  money 
only  by  the  amount  that  men  get  possession  of  for  the  accom- 
plishment of  their  ends.  If  we  could  ascertain  how  many 
exchanges  are  being  made  for  money  in  a  given  community  on 
a  given  day,  and  the  total  value  of  goods  and  services  so 
exchanged,  we  should  have  the  total  volume  of  money  exchanges 
and  should  know  the  demand  for  money  for  use  as  a  medium 
of  exchange.  If,  furthermore,  we  could  ascertain  how  much 
money  the  people  of  that  community  thought  necessary  to  keep 
on  hand  for  use  in  future  exchanges,  how  much  storekeepers 
carried  in  their  tills  in  order  that  they  might  be  able  to  make 
change,  how  much  the  banks  kept  as  a  basis  for  their  credit, 


NATURE  AND  VALUE  OF   MONEY  23 

we  should  know  all  we  could  about  the  demand  for  money  in 
that  community  as  a  store  of  value.  By  combining  the  demand 
for  money  as  a  medium  of  exchange  and  the  demand  for  it  as 
store  of  immediately  exchangeable  value  we  should  have  the 
total  demand  for  money  in  that  community. 

The  demand  for  money  or  for  any  article  can  be  measured 
quantitatively  only  by  an  analysis  of  the  existing  supply.  For 
example,  all  the  wheat  in  the  United  States  falls  into  one  of  the 
following  classes:  (i)  wheat  that  is  being  exchanged,  (2)  wheat 
held  by  millers  for  conversion  into  flour,  (3)  wheat  held  by 
farmers  and  speculators  for  higher  prices.  Those  holding  wheat 
of  the  third  class  do  not  expect  to  get  any  satisfaction  out 
of  its  utility  as  food,  nor  to  add  to  its  utility  and  value  by  con- 
verting it  into  flour.  If  their  stock  of  wheat  were  destroyed, 
they  would  not  replace  it,  for  they  have  no  need  for  the  utility 
which  it  represents.  Hence  in  measuring  the  demand  for  wheat 
utility  we  must  ignore  this  part  of  the  existing  supply.  The 
demand  for  wheat  utility  is  revealed  on  any  day  by  the  quantity 
being  sold  plus  that  which  is  stored  for  future  use.  If  the 
wheat  falling  under  these  two  heads  were  in  any  way  destroyed, 
an  immediate  demand  would  arise  for  wheat  to  take  its  place. 
The  stock  of  wheat  being  held  back  from  the  market  does  not 
represent  any  real  or  effective  demand  for  wheat ;  it  stands  only 
for  a  potential  or  possible  future  demand.  To  distinguish  it 
from  the  supply  of  wheat  on  the  market  at  any  given  time, 
economists  sometimes  call  it  the  potential  supply  or  "  stock  " 
of  wheat.  It  indirectly  affects  the  value  of  wheat  if  its  exist- 
ence is  generally  known,  for  according  to  its  quantity  it  in- 
fluences the  effective  demand,  buyers  always  taking  it  into 
account  in  their  estimates  of  the  value  of  wheat. 

Since  money  seeks  constant  employment,  no  man  under 
normal  conditions  being  able  to  make  money  by  keeping  it, 
there  is  evidently  no  stock  of  money  corresponding  to  the 
wheat  classed  under  the  third  head  in  the  foregoing  paragraph. 
The  supply  of  money  in  any  country  falls  into  one  or  the  .other 
of  the  first  two  classes:  (i)  that  which  is  being  exchanged; 
(2)  that  which  is  held  because  the  owners  expect  to  have  use 


24  MONEY  AND   CURRENCY 

for  it  in  the  near  future.  In  other  words,  the  stock  of  money 
in  any  country  under  normal  conditions  always  represents  and 
measures  the  real  need  or  demand  for  money  utility.  All  the 
money  is  always  at  work. 

Of  money,  therefore,  we  can  say  what  can  be  said  of  no 
other  good,  namely  that  the  supply  under  normal  conditions 
always  equals  and  measures  the  demand.  This  statement  is 
true  only  under  normal  conditions.  During  a  panic,  when  per- 
sonal credit  loses  much  of  its  acceptability  as  a  medium  of 
exchange,  the  need  for  money  increases  with  great  rapidity 
and  the  normal  adjustment  between  demand  and  supply  is  dis- 
turbed, to  the  great  inconvenience  and  loss  of  business  men. 
So  likewise  after  a  panic,  on  account  of  the  prevailing  business 
stagnation,  the  need  for  money  dwindles  and  bankers  find  them- 
selves burdened  with  a  stock  for  which  the  community  has  no 
use.  But  this  lack  of  adjustment  between  the  demand  and  sup- 
ply is  never  long-lived.  The  money  famine  of  the  panic  period 
usually  results  in  an  importation  of  gold,  —  if  that  metal  is 
being  used  as  money,  —  while  the  plethora  of  money  after  a 
panic  generally  ends  in  an  exportation  of  gold,  the  gold  move- 
ments in  both  cases  being  brought  about  automatically  by  forces 
described  in  detail  in  Chapter  IV. 

21.  The  use  of  credit  as  a  medium  of  exchange  tends  to 
lessen  the  demand  or  need  for  money,  and  hence  to  lessen  its 
value,  so  that  the  level  of  prices  is  higher  than  it  would  be  if 
credit  were  not  used.  As  explained  in  Chapter  I,  credit  is  a 
promise  to  pay  money  and  serves  as  a  medium  of  exchange. 
Since  many  promises  to  pay  money  are  canceled  through  the 
agency  of  banks  without  the  use  of  money,  it  is  evident  that 
the  demand  or  need  for  money  must  tend  to  decrease  when  the 
use  of  credit  is  increasing.  In  a  country  whose  business  is 
giving  rise  to  a  certain  volume  of  exchanges  the  demand  for 
money  itself  varies  in  proportion  to  the  use  of  credit,  being 
large  if  credit  is  little  employed  and  small  if  credit  is  much 
employed.  This  relation  of  credit  to  the  value  of  money,  and 
hence  to  prices,  is  very  important  and  will  be  treated  at  length 
in  subsequent  chapters. 


NATURE  AND  VALUE  OF   MONEY  25 

Credit  money,  like  every  other  form  of  credit,  by  economizing 
the  use  of  money,  lessens  the  demand  for  it  and  so  lessens  its 
value.  Credit  money  is  in  no  sense  the  unit  of  prices  or  the 
so-called  standard  of  value.  Its  relation  to  prices  is  like  that 
of  any  other  form  of  credit,  an  indirect  one ;  it  affects  prices 
only  through  its  influence  upon  the  demand  for  money.  For 
illustration,  let  us  suppose  that  Congress  should  decide  to  retire 
and  cancel  the  $346,000,000  in  greenbacks  now  outstanding, 
and  that  no  provision  were  made  to  fill  their  place  with  any 
other  kind  of  credit  money.  The  disappearance  of  the  green- 
backs would  break  the  adjustment  between  the  money  demand 
and  the  money  supply,  and  each  piece  of  money  left  in  circu- 
lation would  be  subject  to  a  greater  demand  than  before,  its 
value  rising  in  consequence.  The  rise  in  the  value  of  gold  in 
the  United  States,  the  visible  expression  of  which  would  be  a 
fall  of  prices,  would  attract  gold  to  this  country  from  other 
parts  of  the  world  until  the  vacant  place  in  our  currency  was 
entirely  filled  with  gold.  Such  a  large  draft  upon  the  world's 
stock  of  gold  would  undoubtedly  raise  its  value  and  so  tend  to 
cause  a  decline  of  prices  in  all  countries  using  gold  as  money.1 

This  illustration,  the  reader  must  bear  in  mind,  is  purely  hypo- 
thetical, and  ignores  several  possible  if  not  probable  effects  of 
a  sudden  retirement  of  the  greenbacks.  In  the  business  world, 
which  is  the  economist's  only  laboratory,  interfering  forces  can- 
not be  eliminated.  The  economist,  therefore,  can  predict  ten- 
dencies only,  not  precise  results.  However,  if  greenbacks  were 
to  be  called  in  and  canceled,  as  we  have  supposed,  it  would 
be  safe  to  predict  that  prices  would  fall  and  that  gold  would 
be  imported  into  the  United  States ;  but  the  extent  of  the  fall 


1  It  should  be  noticed  that  the  quantity  of  money  (i.e.  the  supply  of  money 
units)  needed  in  the  United  States  would  decline  in  proportion  as  the  value  of 
gold  rose.  Thus,  if  the  value  of  gold  rose  10  per  cent,  the  normal  level  of  prices 
would  be  some  9  per  cent  lower  than  before  the  greenbacks  were  retired,  each  dollar 
would  exchange  for  10  per  cent  more  goods  than  before,  and  hence  the  country,  if 
we  suppose  that  meantime  its  business  had  not  grown,  would  need  9  per  cent  less 
money.  Under  this  supposition,  the  supply  of  money  in  the  United  States  amount- 
'ing  to  $2,500,000,000,  the  place  left  by  the  greenbacks  would  be  adequately  filled 
when  Si  21,000,000  of  new  gold  had  found  its  way  into  the  money  supply. 


26  MONEY  AND   CURRENCY 

of  prices  and  of  the  importation  of  gold  could  not  be  foretold, 
for  the  readjustment  of  the  world's  business  to  a  new  level  of 
prices  could  not  be  accomplished  without  a  disturbance  of  credit 
and  of  business  conditions  that  would  seriously  affect  the  demand 
for  money  in  every  country. 

SUPPLY  OF  MONEY 

22.  By  supply  of  money  is  meant  the  number  or  quantity  of 
money  units  1  available  for  use  as  a  medium  of  exchange.    As 
has  been  pointed  out,  under  normal  conditions  the  supply  of 
money  includes  all  the  money  in  a  country.    In  the  case  of  any 
other  good  the  supply  may  be  divided  into  effective  supply,  or 
that  portion  which  is  wanted  on  account  of   its  utility,  and 
potential  supply,  or  that  portion  which  men  are  holding  for  a 
better  market  price.    But  under  normal  conditions  there  is  no 
potential  supply  of  money,  for  no  profit  can  be  made  by  holding 
it.    The  money  supply  of  a  country  then  includes  (i)  all  the 
money  which  is  actually  engaged   in  making  exchanges,  and 
(2)  the  money  held  in  the  pockets  of  the  people,  in  the  tills  of 
shopkeepers,  and  in  the  reserves  of  banks.    The  money  in  the 
second  class  is  commonly  said  to  be  serving  as  a  store  of  value, 
yet  all  of  it  is  held  in  response  to  a  real  demand  for  it  for  serv- 
ice as  a  medium  of  exchange.    Any  pieces  of  money  that  have 
been  hoarded  or  converted  into  ornaments  cannot  properly  be 
considered  part  of  the  effective  money  supply  ;    such  pieces 
must  be  classed  as  in  an  abnormal  potential  supply. 

23.  The  supply  of  money  is  something  different  from  the 
supply  of  money  utility  or  money  value.    This  distinction  it  is 
important  to  notice  for  the  reason  that  money's  power  of  serv- 
ice increases   as   its   value  increases.    The  reader  will  under- 
stand the  distinction  if  he  thinks  of  the  effect  which  a  great  fall 

1  A  money  unit  —  often  called  the  monetary  unit  —  is  a  definite  amount  of 
money  which  law  or  custom  makes  the  basis  for  calculation  or  measurement.  In 
the  United  States  the  dollar  is  the  money  unit,  in  England  the  sovereign,  in  Ger- 
many the  mark,  in  France  the  franc.  All  commodities  have  their  units  of  meas- 
urement, as  bushels  of  wheat,  cords  of  wood,  bales  of  cotton. 


NATURE  AND  VALUE   OF    MONEY  27 

of  prices  would  have  upon  the  purchasing  power  of  the  money 
at  his  command.  A  fall  in  prices  of  50  per  cent,  if  it  were 
uniform  in  its  application  to  all  goods,  would  evidently  enable 
him  to  buy  with  his  money  just  twice  the  amount  which  he 
could  buy  before  the  fall  took  place,  fifty  cents  buying  as  much 
after  the  fall  as  a  dollar  had  bought  before.  If  the  money  supply 
had  not  been  reduced,  its  total  value  or  purchasing  power  would 
have  been  doubled.  Thus,  without  any  change  whatever  in  the 
supply  of  money  units,  a  change  of  the  greatest  importance 
may  take  place  in  the  supply  of  money  value. 

In  the  case  of  no  other  good  is  this  distinction  of  any  conse- 
quence, for  the  utility  of  no  other  good  increases  in  the  same 
proportion  as  its  value.  Wheat,  for  example,  derives  its  value 
from  its  food  utility,  and  this  is  not  augmented  by  an  increase 
in  the  value  of  wheat.  A  bushel  of  wheat  will  feed  no  more 
people  when  worth  two  dollars  than  when  worth  one  dollar. 
But  the  efficiency  of  money,  that  is  to  say  its  power  to  satisfy 
the  human  want  for  which  it  exists,  varies  directly  with  its 
value.  The  more  money  is  worth,  the  more  goods  it  will 
exchange.  Changes  in  the  value  of  money,  therefore,  are  of 
greater  consequence  than  changes  in  the  value  of  anything  else, 
for  such  changes  have  an  immediate  effect  upon  the  usefulness 
of  a  given  supply  of  money. 

This  brief  analysis  of  the  supply  of  money  value  shows  how 
futile  it  is  to  attempt  to  regulate  it  by  legislation,  or  to  inter- 
fere with  the  necessary  relation  existing  between  it  and  the 
supply  of  money  units.  The  grocer  who  puts  sand  in  his  sugar, 
or  the  confectioner  who  puts  terra  alba  into  his  sweets,  is  pub- 
licly condemned  for  the  use  of  adulterants.  In  each  of  these 
cases  the  apparent  supply  of  the  commodity  is  increased  with- 
out any  increase  of  its  utility.  Arbitrary  additions  to  the  supply 
of  money  units  have  the  same  adulterant  effect ;  they  enlarge 
the  apparent  supply  of  money  without  any  increase  of  its  real 
utility  or  effectiveness. 

24.  The  supply  of  money  value  (i.e.  of  utility  possessing 
universal  exchangeability)  is  the  product  of  the  demand  for 
money,  is  independent  of  the  number  of  money  units,  and  tends 


28  MONEY  AND   CURRENCY 

always  to  equal  the  demand.  Let  us  suppose  an  isolated  com- 
munity to  contain  a  population  of  one  hundred  thousand  people, 
who  are  making  and  exchanging  goods  very  much  as  are  the 
people  of  the  United  States  at  the  present  time.  Their  need  for 
money  will  be  a  need  for  a  certain  quantity  of  exchange  power 
or  value,  and  will  be  determined  by  the  volume  of  exchanges 
they  wish  to  make  with  money.  All  their  other  economic  needs 
will  be  for  definite  quantities  of  goods,  and  not  merely  for  value 
embodied  in  goods.  A  family  that  requires  a  barrel  of  flour 
every  month  will  not  find  that  its  need  has  changed  merely 
because  the  value  of  a  barrel  of  flour  has  changed.  In  the  case 
of  flour  it  is  a  certain  amount  of  food  that  is  wanted  and  not 
a  certain  amount  of  value  in  the  shape  of  food.  In  the  case 
of  money,  however,  it  is  a  certain  amount  of  readily  exchange- 
able utility  that  is  wanted  rather  than  a  certain  number  of  coins 
or  bills. 

The  desired  amount  of  money  utility  will  always  be  in  exist- 
ence, for  it  is  created  by  the  need  for  it.  If  the  supply  of 
money  is  $1,000,000,  the  need  for  value  in  a  form  immediately 
exchangeable  will  give  to  that  million  dollars  a  purchasing  power 
sufficient  to  render  it  capable  of  transacting  all  the  business  of 
the  community.  As  the  population  increases,  the  community 
may  be  obliged  to  send  out  to  get  more  flour  or  meat,  but  it 
will  be  under  no  such  necessity  of  increasing  its  supply  of 
money,  for  the  value  of  the  existing  supply  will  increase  as  the 
demand  increases ;  in  other  words,  the  purchasing  power  of 
each  money  unit  will  increase  and  the  prices  of  goods  fall. 

25.  Thus  the  supply  of  money  varies  in  value  automatically, 
always  tending  to  equal  the  demand.  Money  is  unique  in  this 
power  to  adjust  its  utility  to  the  demand.  The  dollar  is  the 
only  tool  used  which  is  capable  of  performing  all  the  work  asked 
of  it.  No  limit  can  be  put  upon  its  exchangeability,  and  hence 
the  service  for  which  each  dollar  is  potentially  competent  is 
indefinitely  great. 

To  return  to  our  isolated  community  of  one  hundred  thousand 
people,  let  us  suppose  that  it  doubles  in  population  and  in  the 
production  of  wealth,  and  that  the  use  of  credit  does  not  change. 


NATURE  AND  VALUE  OF   MONEY 


29 


Then  its  need  for  money  has  doubled.  Although  it  will  now 
need  twice  as  much  money  value  as  formerly,  an  increase  of 
the  money  supply  will  not  be  necessary,  for  the  need  will  be 
met  by  an  increase  in  the  value  of  each  piece  of  money.  In 
other  words,  prices  will  fall  50  per  cent,  and  things  which  for- 
merly sold  at  one  dollar  will  sell  at  fifty  cents. 


RELATION  OF  PRICES  TO  MONEY 

26.  Money  may  be  called  the  unit  of  price  but  not  the  unit 
of  value.  The  latter  expression  is  in  common  use,  for  men,  as 
has  been  said,  are  accustomed  to  think  of  money  as  a  symbol  of 

0  DEMAND 


MONEY             ] 

PRICE  $1.00 

WHEAT 

$1.00                     / 

1BU. 

SUPPLY 


DIAGRAM  I 


all  values,  and  so  they  instinctively  think  of  the  price  of  a  good 
as  revealing  its  value.  But  price  and  value  are  very  different 
concepts,  and  changes  in  value  are  not  necessarily  reflected  by 
changes  in  price.  The  price  of  any  article  depends  upon  two 
circumstances,  its  own  value  and  the  value  of  money.  Any 
cause  tending  to  lower  the  value  of  potatoes,  for  example,  tends 
to  lower  their  price,  for  men  will  then  give  less  money  in  ex- 
change for  them  ;  in  precisely  the  same  way  any  cause  tending 


MONEY  AND   CURRENCY 


to  increase  the  value  or  general  purchasing  power  of  money  will 
tend  to  lower  the  price  of  potatoes  and  of  other  commodities  as 
well,  for  as  the  dollar  increases  in  value  men  will  demand  larger 
quantities  of  goods  in  exchange  for  it. 

Diagram  I  (on  page  29)  may  help  the  reader.  Let  the  circle 
on  the  right  represent  a  bushel  of  wheat,  and  the  circle  on  the 
left  the  monetary  unit  of  a  country,  say  one  dollar.  The  ex- 
change relation  between  the  two  is  the  price  of  wheat,  as  indi- 
cated by  the  horizontal  line  connecting  the  two,  the  price 
being  assumed  at  one  dollar. 

The  value  of  wheat  jdepends  upon  the  demand  for  it  and  the 
supply.  The  value  of  money  depends  upon  the  demand  for  and 
supply  of  money.  Let  us  suppose  now  that  the  supply  of  wheat 
is  increased  without  any  change  in  the  demand,  and  that  the 
value  of  wheat  falls.  Then  if  the  demand  and  supply  conditions 
determining  the  value  of  money  have  not  changed,  we  shall 
have  a  fall  in  the  price  of  wheat,  as  illustrated  in  Diagram  II, 
in  which  the  dotted  lines  show  the  new  position  taken  by 
wheat  in  relation  to  money. 


DEMAND 


DEMAND 


SUPPLY 


DIAGRAM  II 


NATURE  AND  VALUE  OF    MONEY 


Next  let  us  suppose  that  the  conditions  governing  the  general 
value  of  wheat  remain  unchanged,  but  that  the  value  of  money 
has  been  raised  by  an  increasing  demand.  Here  again  we 
get  a  fall  in  the  price  of  wheat,  shown  by  the  dotted  lines  in 
Diagram  III. 


DEMAND 


SUPPLY 


DIAGRAM  III 


The  reader  will  see,  after  very  little  analysis,  that  the  price  of 
wheat  depends  on  four  very  different  circumstances  :  that  it  will 
tend  to  rise  (i)  when  the  demand  for  wheat  increases  ;  (2)  when 
the  supply  of  wheat  decreases ;  (3)  when  the  supply  of  money 
increases  ;  (4)  when  the  demand  for  money  decreases  ;  and  that 
it  will  tend  to  fall  when  opposite  changes  take  place. 

That  the  prices  of  goods  depend  quite  as  much  upon  the 
value  of  money  as  upon  the  value  of  the  goods  themselves  is 
a  truth  that  the  reader  must  clearly  grasp.  It  may  be  a  little 
puzzling  at  first,  for  it  is  natural  to  think  of  money  as  a  fixed 
and  stable  thing,  with  respect  to  which  other  things  fluctuate. 
To  many  men  the  idea  that  money  changes  in  value  is  as  novel 
when  first  presented  as  the  notion  that  the  ocean  changes  its 


32  MONEY  AND   CURRENCY 

level.  The  reason  for  this  misapprehension  with  regard  to  the 
value  of  money  lies  in  the  fact  that  men  think  of  price  as  being 
identical  with  value,  and  since  the  " price"  of  gold  (and  of  sil- 
ver in  a  country  where  it  is  freely  coined  into  money)  never 
changes,  it  is  assumed  that  the  value  of  gold  is  unchanging. 
The  common  belief  in  the  stability  of  money  is  analogous  to  the 
illusion  existing  among  primitive  peoples  with  regard  to  the 
solar  system.  They  think  the  earth  is  stationary.  It  is  their 
viewpoint,  and  all  changes  on  the  screen  of  the  firmament  seem 
to  them  to  reflect  changes  in  the  heavens,  not  in  the  position 
of  the  earth.  The  analogy,  like  all  analogies,  is  imperfect,  but 
it  is  suggestive.  The  fact  that  changes  in  price  reflect  changes 
in  the  value  of  money  as  well  as  changes  in  the  values  of  goods 
is  very  important. 

27.  The  world  has  had  experience  with  two  kinds  of  money: 
(i)  commodity  money,  or  money  made  out  of  material  of  which 
the  free  use  is  permitted  as  money,  so  that  its  value  is  the 
product  of  two  sets  of  utilities,  namely  its  utility  as  money 
and  its  utilities  as  an  ordinary  commodity ;  (2)  fiat  money, 
or  money  the  value  of  which  has  no  relation  to  the  value  of 
the  material  out  of  which  it  is  made,  being  the  product  solely 
of  its  utility  as  money. 

Gold  and  silver  have  for  many  centuries  been  used  as  com- 
modity money.  The  free  coinage  of  these  metals  is  essential 
to  their  use  as  commodity  money.  Coins  made  of  gold  or  silver, 
if  their  free  coinage  is  not  permitted,  are  either  credit  money 
or  fiat  money.  By  free  coinage  of  a  metal  is  meant  that  any 
person  has  the  right  to  take  it  to  the  government  mint  and 
have  it  converted  into  standard  coin.  When  the  free  coinage  of 
a  metal  is  permitted,  the  value  of  the  metal  practically  deter- 
mines the  value  of  money.1 

The  value  of  fiat  money  depends  solely  upon  the  demand  for 
and  supply  of  money.  By  some  writers  it  has  been  called 
"  pure  money  "  or  "  ideal  money."  Others  seem  so  impressed 
by  the  risks  connected  with  the  use  of  fiat  money  that  they 
deny  even  its  theoretical  possibility,  insisting  that  a  substance 

1The  use  of  the  precious  metals  as  money  is  discussed  in  Chapter  IX. 


NATURE  AND  VALUE  OF   MONEY  33 

used  as  money  must  have  value  before  it  can  be  so  used,  and 
that  it  gets  no  added  value  from  such  use.  Fiat  money  is 
more  than  a  theoretical  possibility  and  it  is  of  vital  importance 
that  its  nature  be  understood.  It  is  the  subject  of  Chapters  XIII 
and  XIV. 

LITERATURE 

MILL,  Political  Economy,  Book  III,  chaps,  vii,  viii,  and  xv;  WHITE, 
Money  and  Banking,  Book  I,  chap,  i ;  WALKER,  Money,  Part  I,  chaps,  i-ii; 
KINLEY,  Money,  chaps,  i,  ii,  v,  and  viii ;  LAUGHLIN,  Principles  of  Money, 
chaps,  i-ii;  WILLIAM  SMART,  Studies  in  Economics,  chap,  v;  A.  DEL 
MAR,  History  of  Monetary  Systems,  also  Money  and  Civilization.  KARL 
MENGER'S  article  on  "  The  Origin  of  Money,"  in  the  London  Economic 
Journal  (June,  1892),  is  keen  and  profound.  W.  W.  CARLILE'S  The 
Evolution  of  Modern  Money  (London,  1901)  is  well  written  and  learned, 
but  not  always  clear.  W.  A.  SHAW'S  History  of  the  Currency  is  a  con- 
venient compilation,  but  is  confused  in  its  inferences  and  deductions.  The 
same  may  also  be  said  of  J.  SCHOENHOF'S  History  of  Money  and  Prices 
(New  York,  1896).  H.  D.  MACLEOD'S  works  on  money  and  credit,  although 
suggestive  and  informing,  are  marred  by  a  too  confident  dogmatism. 

Views  not  in  accord  with  those  presented  in  this  book  will  be  found  in 
LAUGHLIN'S  Principles  of  Money,  SCOTT'S  Money  and  Banking,  KINLEY'S 
Money,  FARRER'S  Studies  in  Currency,  and  CARLILE'S  Evolution  of 
Modern  Money.  Professor  LAUGHLIN'S  Principles  is  a  valuable  reference 
book  on  account  of  its  bibliographies  and  historical  data. 

The  reader  will  find  good  expositions  of  the  theory  of  value  in  the  works 
on  economics  by  MILL,  MARSHALL,  SEAGER,  FETTER,  GIDE,  PIERSON,  and 
SELIGMAN. 


CHAPTER  III 

NATURE  AND   USES   OF   CREDIT 

28.  Various  definitions  of  credit.  To-day  a  credit  instrument  is  a  promise  to 
pay  money.  29.  The  important  service  of  credit  as  an  instrument  for  the  transfer 
of  capital.  30.  Credit  does  not  create,  yet  it  leads  to  increased  production. 
31.  The  basis  of  credit  is  confidence.  32.  To  what  extent  is  credit  "based  upon 
goods"?  33.  Credit  of  unlimited  acceptability,  —  popularly  called  money.  Bank 
notes  and  government  notes.  34.  Credit  of  limited  acceptability,  —  the  promissory 
note,  checks,  bills  of  exchange,  book  accounts.  35.  Banks  are  dealers  in  credit. 
36.  Brief  analysis  of  a  bank's  operations,  —  checks,  drafts,  "deposit  currency," 
clearing  house.  37.  Book  accounts  and  bills  of  exchange.  38.  Large  use  of  credit 
of  limited  acceptability.  39.  Money  as  a  basis  of  credit  and  as  a  hand-to-hand 
medium  of  exchange.  40.  Forms  of  credit  that  do  not  serve  as  a  medium  of 
exchange.  41.  Credit,  on  account  of  its  swiftness  and  convenience,  is  employed 
by  men  to  the  fullest  possible  extent.  42.  Elasticity  the  essential  characteristic  of 
a  good  credit  system.  In  the  United  States  this  exists  only  in  the  case  of  credit 
of  limited  acceptability 

28.  The  word  " credit"  is  employed  in  different  ways  in  every- 
day life  and  in  the  business  world.  No  single  definition  will 
cover  its  full  significance.  A  man  is  said  to  have  credit,  for 
instance,  if  he  is  known  to  be  a  man  of  integrity  who  always 
pays  his  debts  when  due.  Here  credit  means  the  power  to 
borrow  or  to  get  goods  or  services  by  promising  to  pay  in  the 
future.  To  the  bookkeeper  the  word  "credit "  means  the  opposite 
of  "  debt,"  namely  that  something  is  owed  to  a  person  or  to  an 
account.  If  a  general  wins  a  victory,  we  give  him  credit  for  it, 
and  his  friends  object  if  the  credit  is  given  to  any  one  else. 
Preserving  the  idea  of  indebtedness,  we  may  say  that  by  this 
use  of  the  word  we  give  him  his  due.  The  etymology  of  the 
word  takes  us  back  to  the  Latin  credo,  "  I  believe,"  and  the 
Roman  accountants  employed  creditum  as  our  bookkeepers  do 
"  credit,"  as  signifying  something  due  a  person.  John  Stuart 
Mill  in  his  Political  Economy  defines  credit  as  being  the  per- 
mission to  use  another's  capital.  Mr.  H.  D.  MacLeod  in  his 
Theory  of  Credit  defines  it  as  "a  right  of  action." 

34 


NATURE  AND   USES   OF  CREDIT  35 

These  definitions  are  correct  enough,  but  they  do  not  set 
forth  the  relation  of  credit  to  money.  When  viewed  as  a 
medium  of  exchange  credit  is  merely  a  promise  to  pay  money. 
As  a  concrete  definition  that  answers  every  purpose.  A  promise 
to  pay  money,  when  printed  or  written  or  in  any  other  way 
given  tangible  form,  is  commonly  called  a  "credit  instrument." 
Promissory  notes  and  greenbacks,  for  example,  are  credit 
instruments.  Viewing  credit  abstractly,  we  may  define  it  as 
the  power  to  buy  goods  or  services  by  giving  a  promise  or  con- 
tract to  pay  money  in  the  future.  These  definitions  tell  us  what 
credit  is  as  a  medium  of  exchange. 

Mr.  Mill's  view  of  credit  as  permission  to  use  another's 
capital  calls  attention  to  a  very  important  service  which  credit 
performs.  When  a  man  borrows  $1000  to  increase  the  capital  of 
his  business,  and  gives  his  promissory  note  therefor,  the  lender 
has  foregone  the  use  of  capital  and  permitted  another  man  to  use 
it.  Hence,  if  we  were  discussing  the  production  of  wealth  and 
the  sources  from  which  men  get  capital  for  business  purposes, 
it  would  be  correct  to  say  that  they  get  some  of  it  by  means  of 
credit,  whereby  the  man  who  has  capital  he  does  not  want  to 
use  transfers  it  to  one  who  does  want  to  use  it.  In  a  transaction 
of  this  sort  it  should  be  noted,  however,  that  the  credit  instru- 
ment upon  which  the  transfer  is  based,  namely  the  promissory 
note,  is  itself  a  promise  to  pay  money.  Modern  industry  would 
not  be  possible  without  the  use  of  money  and  credit.  Both 
enable  men  easily  to  get  rid  of  those  goods  for  which  they 
have  no  use,  and  to  obtain  those  which  they  want. 

Mr.  MacLeod's  definition  gives  us  the  legal  aspect  of  credit. 
A  man  who  gives  a  promise  to  pay  money  gives  a  right  of 
action  against  himself.  The  holder  of  the  promise  may  sue 
him  for  payment  and  the  law  will  enforce  the  payment.  From 
the  legal  point  of  view,  therefore,  it  is  quite  proper  to  speak  of 
credit  as  a  right  of  action.  But  that  definition  gives  no  idea  of 
the  importance  of  credit  as  a  medium  of  exchange.  The  defi- 
nition may  further  be  criticised  in  that  it  is  not  at  all  certain 
that  credit  was  not  employed  as  a  medium  of  exchange  long 
before  credit  contracts  were  enforced  by  the  courts  of  law. 


36  MONEY  AND   CURRENCY 

29.  In  this  book  credit   is  treated  only  in  its  relation   to 
money,  i.e.  as  a  medium  of  exchange;  yet  it  should  be  noted 
that  this  is  not  its  primary  and  most  important  use.    It  is  as  an 
instrument  for  the  transfer  of  capital  that  credit  is  most  useful 
to  mankind.    By  capital  the  economist  means  all  those  forms 
of  wealth  —  all   those  goods,    such  as   tools,   machinery,    raw 
materials,  and  foodstuffs  —  which  men  use  in  the  production 
of  new  wealth.    These  often  belong  to  men  who  have  neither 
ability  nor  desire  to  utilize  them,  and  would  go  to  waste  or  lie 
idle  if  our  modern  credit  system  had  not  been  developed.  This 
enables  men   of  brains,   energy,   and   skill,  whom  economists 
call  entrepreneurs  (i.e.  men  who  undertake  enterprises)  to  get 
possession  of  a  country's  capital  and  devote  it  to  productive 
uses.    The  system  is  so  finely  organized  that  the  average  man, 
even  though  himself  a  borrower  or  lender,  does  not  fully  under- 
stand its  mechanism.    The  entrepreneur  does  not  borrow  the 
capital,  i.e.  the  tools,  raw  materials,  etc.,  which  he  needs  ;  he 
gets  credit  from  a  bank,  and  with  that  buys  what  he  needs 
for  the  prosecution  of  his  enterprise.    He  is  commonly  said  to 
borrow  "  money,"  or  "  capital,"  but  these  popular  expressions 
are  inaccurate ;  he  borrows  credit,  or,  in  other  words,  a  right  to 
demand  money,  and  with  that  buys  his  capital,  becoming  the 
absolute  owner  of  it.    The  popular  idea  that  he  borrows  capital, 
or  money,  although  not  in  accord  with  the  scientific  definitions 
of  those  terms,  is  justified,  as  will  be  shown  later,  by  the  neces- 
sary correspondence  existing  between   the  amount   of  credit 
which  the  banks  of  a  country  are  able  to  lend  and  the  amount 
of  wealth  within  that  country  which  the  owners  do  not  wish  to 
consume  or  utilize  in  production. 

30.  Credit,  it  should  be  noted,  is  not  itself  a  thing  or  com- 
modity, nor  does  it  create  anything.    It  is  merely  an  agency  of 
transfer.    No  more  wealth,  no  more  capital,  no  more  goods, 
exist  after  credit  is  given  than  before.    Nevertheless  the  use 
of  credit  does  lead  to  an  increase  of  wealth,  for  it  brings  the 
productive  agents  of  a  country  into  the  possession  of  those 
men  who  are  most  competent  to  utilize  them.    Just  as  the  rail- 
road has  rendered  the  rich  prairies  of  Nebraska  and  Kansas 


NATURE  AND   USES   OF  CREDIT  37 

* 

available  to  the  farmer,  so  does  credit  render  available  to  the 
modern  business  man  remote  hoards  of  capital  that  would 
otherwise  be  idle.  Indirectly,  therefore,  credit  is  an  agent  of 
production,  and  it  is  always  a  fair  inference  that  a  country 
possessing  a  highly  developed  credit  system  is  'making  active 
use  of  its  productive  resources.  In  such  a  country  it  is  fair, 
also,  to  infer  that  law  and  order  prevail,  for  unless  contracts 
are  observed  credit  cannot  flourish. 


FOUNDATION  OF  CREDIT 

31.  The  basis  of  credit  is  confidence.  No  man  will  part  with 
his  goods  in  exchange  for  a  promise  to  pay  money  unless  he 
has  confidence  in  the  ability  and  will  of  the  purchaser  to  keep 
the  promise  and  make  the  money  payment  when  it  falls  due. 
This  confidence  is  twofold  in  character.  The  lender  must,  in 
the  first  place,  feel  morally  certain  that  the  borrower  is  going 
to  be  able  to  pay  his  debt ;  that  his  affairs  are  in  such  shape 
or  that  his  business  ability  is  such  that  he  will  be  able  to  pay 
the  debt  when  it  is  due.  In  the  second  place,  the  lender  must 
feel  certain  that  the  borrower  is  a  man  of  integrity  who  will  not 
seek  to  avoid  payment.  It  is  evident  that  no  one  will  part  with 
something  valuable  in  exchange  for  a  mere  promise  if  he  is 
doubtful  about  the  promise  being  kept.  To  be  sure,  the  law 
protects  the  lender  as  far  as  possible,  yet  a  man  who  is  bent 
upon  fraud  is  sometimes  able  to  circumvent  the  law.  The 
delay  caused  by  litigation  is  vexatious,  and  men  never  volun- 
tarily accept  a  credit  instrument  which  is  likely  to  be  contested 
in  the  courts.  Credit,  therefore,  is  based  upon  confidence  in 
character  as  well  as  upon  confidence  pi  business  ability. 

In  the  case  of  some  credit  instruments  the  lender's  confi- 
dence is  founded  upon  the  property  of  the  borrower  as  well  as 
upon  his  character;  as,  for  instance,  when  loans  are  secured  by 
a  mortgage  upon  real  estate  or  other  property  of  the  borrower. 
Credit  of  this  kind  is  of  far  less  importance  as  a  medium  of 
exchange  than  credit  which  is  not  secured  by  mortgage.  The 
greater  part  of  the  loans  of  our  commercial  banks  is  not  secured 


38  MONEY  AND   CURRENCY 

by  the  pledge  of  property,  the  banks  relying  for  their  safety 
upon  the  character  and  business  ability  of  the  borrowers. 

The  confidence  that  underlies  credit  is  not  altogether  per- 
sonal. A  man's  ability  to  pay  a  debt  usually  depends  upon  his 
ability  to  sell  goods,  and  that  depends  upon  the  ability  of  peo- 
ple to  buy  the  goods  and  pay  for  them.  The  confidence  upon 
which  credit  is  based,  therefore,  is  rooted  in  general  business 
conditions.  When  times  are  brisk  and  the  demand  for  goods  is 
temporarily  outrunning  the  supply,  the  credit  of  any  individual 
is  much  better  than  when  opposite  conditions  prevail,  for  more 
confidence  is  felt  in  his  ability  to  carry  on  his  business  success- 
fully and  make  good  his  obligations. 

32.  On  account  of  this  dependence  of  credit  upon  business  con- 
ditions some  writers  have  held  that  credit  is  based  upon  goods. 
They  describe  it  as  the  power  to  "  convert  goods  into  means  of 
payment,"  or  as  a  "transfer  of  goods  in  consideration  of  a 
promise  of  a  future  return  of  equivalent  value."  l  This  view  is 
given  plausibility  by  some  such  illustration  as  the  following. 
Jones,  a  miller,  has  five  thousand  bushels  of  wheat  in  a  ware- 
house; he  wishes  to  make  improvements  on  his  mill  that  will 
cost  $1000,  but  has  no  money;  by  pledging  the  wheat  as 
security  he  is  able  to  borrow  $1000  from  a  bank,  thus  con- 
verting the  wheat  into  a  means  of  payment.  According  to 
this  view,  the  amount  of  credit  available  in  a  given  community  is 
strictly  limited  by  the  value  of  the  bankable  or  easily  salable 
goods  in  the  community.  As  the  reader  can  readily  see,  this 
is  not  the  case.  Banks  do  more  than  lend  money  upon  the 
security  of  goods  already  in  existence;  they  lend  readily  to 
men  in  whose  power  to  produce  goods  they  have  confidence. 
In  other  words,  that  confidence  which  is  the  corner  stone  of 
credit  may  be  founded  either  on  the  debtor's  possessions  or  on 
his  personal  character  and  business  ability.  Credit  is  limited, 
therefore,  not  by  a  community's  wealth,  but  by  that  plus 
lenders'  estimates  of  its  power  to  produce  wealth. 

Nor  is  it  correct  to  say,  as  do  some  writers,  that  what  men 
really  borrow  is  goods,  not  money.  What  the  borrower  really 

1  See  Laughlin's  Principles  of  Money,  chap,  iv ;  also  Kinley's  Money,  p.  201. 


NATURE  AND  USES  OF  CREDIT  39 

wants  is  goods,  but  to-day  what  he  always  borrows  is  money 
or  a  right  to  demand  money.  Money,  not  goods,  is  what  he 
promises  to  repay.  With  the  borrowed  funds,  whether  in  the 
form  of  cash  in  hand  or  credit,  he  buys  the  goods  he  wants  and 
makes  use  of  them.  They  belong  to  him.  He  cannot  pay  his 
debt  with  them,  for  they  are  not  what  the  lender  wants.  Those 
writers  who  say  that  credit  transactions  are  loans  of  goods 
"  expressed  in  terms  of  money,"  canceled  by  transference  of 
"titles  to  goods"  (that  is,  money)  from  debtor  to  creditor, 
speak  in  a  vague  and  misleading  metaphor.  Money  is  not  a 
title  to  goods  or  property.  It  is  itself  a  good,  a  piece  of  prop- 
erty or  wealth.  It  has  real  value  as  much  as  any  other  good 
or  commodity  that  men  use.  Money,  or  the  right  to  demand 
money,  is  the  thing  lenders  part  with,  and  money  is  the  thing 
they  want  back.  To  say,  as  some  do,  that  credit  promises  the 
return  merely  of  equivalent  value,  the  loan  only  having  been 
"expressed  in  terms  of  money,"  is  not  true.  Lenders  do  not 
want  "equivalent  value  "  in  payment  ;  they  want  back  the  same 
thing  they  loaned,  namely  a  definite  sum  of  money  or  a  satis- 
factory title  to  it;  and  they  are  satisfied  with  money  even 
though  a  rise  of  prices  may  have  made  its  value  less  than  when 
they  parted  with  it. 

It  may  strike  the  reader  that  unnecessary  emphasis  is  given 
to  this  point  of  relation  between  money  and  credit.  It  is  an 
important  point,  however,  and  in  the  literature  of  money  it  has 
been  sadly  obscured  by  a  careless  use  of  words.  Furthermore 
economists  are  prone  to  consider  the  problems  of  interest, 
profits,  and  wages,  the  whole  theory  of  the  production,  exchange, 
and  distribution  of  wealth,  as  if  money  were  not  used  at  all,  it 
being  assumed  that  the  introduction  of  money  as  a  medium 
makes  no  difference  in  results.  Beyond  question  the  general 
laws  governing  production  and  distribution  can  in  that  way  be 
arrived  at.  It  is  right  enough  to  say  that  the  real  profits  of  the 
entrepreneur,  the  real  income  of  the  lending  capitalist,  and  the 
real  wages  of  the  workingman  are  goods,  if  the  meaning 
of  "  real  "  in  this  use  is  correctly  understood.  The  word,  how- 
ever, is  susceptible  of  misinterpretation. 


40  MONEY  AND   CURRENCY 

Wages,  profits,  and  interest  are  not  paid  in  goods  but  in 
money.  If  money  were  always  stable  and  changeless  in  value, 
then  changes  in  money  wages  would  reflect  changes  in  so-called 
"real  wages."  But  money  is  not  stable.  It  is  not  a  title  to  goods. 
It  is  a  fluctuating  good,  sometimes  dearer,  sometimes  cheaper. 
It  is  more,  therefore,  than  a  mere  medium  of  transfer,  for  by  its 
changes  of  value  it  introduces  into  the  business  world  a  disturb- 
ing element  that  is  lacking  in  the  classical  economist's  world  of 
barter.  Hence,  to  be  exact  and  scientific,  we  must  be  careful 
to  describe  things  as  they  actually  exist,  not  as  they  might 
exist  in  a  hypothetical  state.  Shall  we  say  that  the  average 
laborer  is  to-day  paid  in  goods  ?  Certainly  not.  He  is  paid  in 
cash,  and  the  dollars  he  gets  do  not  always  buy  the  same  quan- 
tity of  goods,  for  prices  are  constantly  changing.  In  the  same 
way  the  capitalist  gets  the  principal  and  interest  of  his  loans 
in  money,  not  in  goods.  In  the  modern  world  of  business 
money  is  the  most  important  single  commodity.  It  cannot  be 
ignored  as  a  mere  go-between,  yet  that  is  what  those  writers 
do  who  declare  modern  credit  to  be  the  power  to  borrow  goods 
on  condition  that  an  "  equivalent  "  be  returned  in  the  future, 
and  who  assume  that  modern  bankers  lend  goods  and  receive 
back  goods  from  borrowers.  Money  is  the  thing  men  toil  and 
sweat  for  in  this  world;  it  is  the  thing  they  borrow  and  repay; 
it  is  a  real  thing,  not  a  mere  title  to  something,  and  credit  is  its 
representative. 

Is  it  not  true,  then,  that  credit  is  based  on  goods?  It  all 
depends  on  what  that  expression  means.  In  a  certain  sense 
money  itself  can  be  said  to  be  based  on  goods,  for  its  exchange- 
ability for  goods  is  the  essence  of  its  value.  Credit,  being 
merely  money  in  posse,  has  the  same  dependence  upon  goods, 
and  also  a  dependence  born  of  the  contingent  exchangea- 
bility of  goods  into  money.  The  banker  who  lends  $1000 
to  a  grocer  gives  credit  because  groceries  are  easily  market- 
able, that  is  exchangeable  for  money,  and  he  would  not  lend 
the  grocer  a  sum  of  money  exceeding  the  sum  his  stock  of  gro- 
ceries would  sell  for,  nor  indeed  so  large  a  sum.  Undoubtedly 
back  of  all  loans  or  credit  transactions  there  is  confidence  in  the 


NATURE  AND  USES   OF   CREDIT  41 

lender's  mind  that  wealth  exists,  or  will  exist,  sufficient  to  liqui- 
date the  debt  at  maturity.  But  that  wealth  must  be  exchange- 
able, i.e.  salable  for  money  ;  otherwise  the  lender  refuses  the 
loan.  It  follows,  as  already  said,  that  the  credit  given  in  a 
community  at  a  particular  time  is  limited  in  a  general  way  by 
the  amount  of  wealth  in  that  community;  in  that  meaning  and 
in  that  only  is  credit  based  on  goods. 

But  there  should  be  no  quibbling  about  words.  Whether  we 
say  that  credit  is  based  on  money,  on  confidence,  or  on  goods, 
the  facts  are  clear.  Every  credit  transaction  to-day  (barter 
credit,1  like  barter  itself,  being  left  out  of  account  as  unimpor- 
tant) creates  a  contract  to  pay  money,  and  can  be  settled  or 
canceled  only  by  the  delivery  of  money  or  of  another  contract 
to  pay  money.  The  reader  must  not  let  this  simple  fact  be 
obscured  by  the  complexity  of  credit  operations  in  modern  busi- 
ness. In  the  United  States  we  seldom  see  a  gold  coin.  Almost 
all  exchanges  are  made  with  credit,  — with  greenbacks,  silver 
dollars,  bank  notes,  checks,  and  bills  of  exchange,  —  one  credit 
obligation  being  canceled  by  another.  Yet  underneath  all  these 
many  millions  of  credit  promises,  giving  them  their  value,  rests 
the  dollar  of  23.22  grains  pure  gold.  If  doubt  as  to  the  converti- 
bility of  these  promises  into  gold  should  once  enter  our  heads, 
no  matter  how  rich  in  goods  the  country  might  be,  the  whole 
vast  mass  of  credit  would  begin  to  melt  away,  its  value  disap- 
pearing entirely  if  doubt  became  certainty,  unless  the  law 
should  give  a  new  definition  to  "dollar  "  and  provide  for  a  new 
method  of  redeeming  all  outstanding  credit. 

CREDIT  OF  GENERAL  ACCEPTABILITY 

33.  From  the  point  of  view  of  acceptability,  or  usefulness  as 
a  medium  of  exchange,  credit  is  divided,  as  we  have  already 
seen,  into  two  classes:  (i)  credit  of  general  acceptability;  (2) 
credit  of  limited  acceptability. 

1  By  barter  credit  is  meant  the  swapping  of  goods,  one  delivery  being  deferred  ; 
or  the  borrowing  of  goods  on  promise  to  return  the  same,  or  an  equivalent  in 
other  goods,  at  a  later  date.  In  such  transactions  money  does  not  appear  on 
either  side,  and  no  part  of  the  bargain  is  "  expressed  in  terms  of  money." 


42  MONEY  AND   CURRENCY 

Credit  of  general  acceptability  includes  those  forms  of  credit 
which  all  persons  within  a  country  are  willing  to  take  in  pay- 
ment for  goods  delivered  or  services  rendered.  Credit  instru- 
ments of  this  class  are  known  as  "  credit  money,"  and  should 
possess  at  least  four  qualities:  (i)  they  must  be  issued  by  a 
promisor  in  whom  all  the  people  have  confidence ;  (2)  they 
must  be  in  convenient  denominations ;  (3)  they  must  be  easily 
recognizable ;  (4)  they  must  be  difficult  to  counterfeit.  In 
the  United  States  the  most  familiar  credit  instruments  of  this 
class  are  the  bank  note,  the  greenback,  and  the  silver  dollar  and 
certificate.  These  are  mere  promises  to  pay  money,  but  every 
man  has  such  confidence  in  the  promisor  that  he  is  willing  to 
take  them  in  lieu  of  money.  Since  within  the  country  they  do 
all  the  work  of  money  as  a  medium  of  exchange,  they  are  pop- 
ularly called  money. 

The  bank  note  is  a  bank's  promise  to  pay  money  to  bearer. 
It  is  printed  in  convenient  denominations  and  in  some  countries 
is  made  legal  tender  for  the  payment  of  all  debts.  The  accept- 
ability of  bank  notes  is  due  to  the  prevailing  confidence  in  the 
stability  of  banks  and  to  the  convenient  denominations  in  which 
the  notes  are  issued.  Credit  is  a  bank's  stock  in  trade,  some- 
thing which  it  must  maintain  at  all  costs.  Its  failure  to  redeem 
one  of  its  promises  on  demand  means  immediate  bankruptcy 
and  ruin.  Banks,  therefore,  guard  their  credit  as  a  woman  does 
her  good  name,  and  as  a  result  people  come  to  feel  that  a  bank's 
promise  to  pay  money  is  as  good  as  money  itself. 

Under  government  credit  money  is  included  all  noninterest- 
bearing  promises  to  pay  issued  by  the  government  in  denomi- 
nations convenient  for  use  as  a  medium  of  exchange.  In  the 
United  States  there  are  several  kinds  of  this  credit  money 
which  are  described  in  Chapters  XV  and  XVI.  The  people  of 
the  United  States  in  their  daily  transactions  use  credit  money 
almost  altogether.  The  standard  money  of  the  country  is  gold, 
but  very  little  of  it,  except  in  the  Pacific  coast  states,  is  in  circu- 
lation as  a  medium  of  exchange.  It  is  estimated  that  all  the 
gold  in  the  country  amounts  to  something  like  ^i,36o,ooo,ooo.1 

1  July  i,  1905. 


NATURE  AND  USES  OF  CREDIT         43 

Of  this  sum  the  government  holds  about  one  half  and  the  national 
banks  have  in  their  possession  about  $500,000,000.  The  gov- 
ernment's promises  to  pay  money  are  generally  acceptable  as 
a  medium  of  exchange  because  of  the  popular  confidence  in  the 
ability  of  the  government  to  redeem  its  promises.  If  for  any 
reason  that  confidence  were  shaken  and  people  became  doubtful 
about  the  credit  money  being  redeemed,  its  acceptability  would 
surfer  at  once. 

Any  form  of  credit  which  people  generally  are  willing  to  accept 
in  place  of  standard  money  becomes  credit  money  whether  so 
called  or  not.  During  the  panic  of  1893,  for  example,  when 
confidence  in  the  business  outlook  was  thoroughly  shaken,  the 
use  of  personal  credit  was  greatly  restricted,  and  the  demand 
for  a  generally  acceptable  medium  of  exchange  to  take  its  place 
far  outran  the  supply.  In  many  communities  the  "  pay  checks  " 
of  large  corporations  were  made  to  serve  as  a  sort  of  emer- 
gency currency.  The  people  had  confidence  in  the  corporations 
although  they  had  lost  confidence  in  each  other.  These  "  pay 
checks,"  within  the  small  field  where  they  circulated,  were 
credit  money.  They  could  not  be  called  national  credit  money, 
for  their  circulation  was  limited.  They  were  community  credit 
money. 

Credit  money  serves  not  only  as  a  generally  acceptable  medium 
of  exchange  but  also  as  a  store  of  value.  Men  make  no  distinc- 
tion between  credit  money  and  gold  when  they  are  laying  aside 
currency  for  use  in  the  future  as  a  medium  of  exchange.  Banks 
are  glad  to  have  their  reserves  in  gold  and  gold  certificates  (the 
latter  representing  gold  coin  on  deposit  in  the  United  States 
Treasury),  yet  they  are  almost  equally  well  satisfied  to  have 
greenbacks  or  treasury  notes  of  1 890,  for  these  are  redeemable 
in  gold  and  are  also  legal  tender.  Credit  money,  however,  is  not 
a  denominator  or  measure  of  value.  It  is  in  no  sense  standard 
money.  It  is  a  promise,  and  its  value  or  purchasing  power  is 
derived  from  the  value  of  the  thing  promised,  namely  money. 
The  relation  of  credit  money  to  the  value  of  money,  i.e.  to  the 
prices  of  goods,  will  be  discussed  in  Chapters  IV  and  XV. 


44  MONEY  AND   CURRENCY 

CREDIT  OF  LIMITED  ACCEPTABILITY 

34.  Credit  instruments  of  limited  acceptability  are  issued 
under  such  conditions  as  make  them  an  acceptable  means  of 
payment  only  within  a  restricted  field.    They  include  the  prom- 
issory note,  the  bill  of  exchange,  various  forms  of  bank  credit, 
and  the  book  account. 

A  promissory  note  is  an  unconditional  promise  in  writing  to 
pay  a  certain  sum  of  money  at  a  stated  time.  It  is  the  simplest 
form  of  credit  instrument  and  is  probably  the  first  one  that 
came  into  use.  Such  a  note  may  be  given  by  a  man  or  woman, 
by  a  firm  or  corporation,  in  order  to  borrow  money  or  in  pay- 
ment for  goods.  Promissory  notes  figure  in  all  loan  transac- 
tions, and,  as  we  shall  see  later,  constitute  a  large  part  of  the 
property  or  assets  of  a  bank. 

For  the  protection  of  the  holder  of  a  promissory  note  a  body 
of  law  exists  in  every  civilized  country,  which  aims  to  provide 
for  all  possible  contingencies.  A  note,  for  instance,  is  a  nego- 
tiable instrument  if  made  payable  to  order  or  to  bearer.  We 
cannot  enter  into  the  law  of  promissory  notes.  For  the  present 
purpose  it  is  sufficient  to  call  attention  to  the  fact  that  such  an 
instrument  will  not  be  accepted  except  by  men  who  have  con- 
fidence in  the  maker  or  indorser.  A  promissory  note,  therefore, 
is  capable  of  serving  as  a  medium  of  exchange  only  within  a 
narrow  field.  Its  main  use  is  not  as  a  medium  of  exchange, 
but  as  an  instrument  for  the  transfer  of  capital  from  lender  to 
borrower. 

35.  Bank  credits  are  the  most  important  form  of  credit  in  the 
country  and  furnish  to  the  business  world  a  medium  of  exchange 
often  described  as  "deposit  currency."    A  bank  is  an  institu- 
tion which  deals  in  credit.    The  reader  must  rid  his  mind  of  the 
common  notion  that  a  bank  deals  in  money.    Just  as  a  hard- 
ware store  handles  hardware,  a  dry-goods  store  dry  goods,  or  a 
grocery  store  groceries,  so  a  bank  handles  credit.    Money  is  not 
the  thing  it  deals  in  any  more  than  money  is  the  thing  in  which 
a  hardware  store  deals.    Since  credit,  however,  is  a  promise  to 
pay  money,  a  bank  must  always  have  on  hand  considerable  cash 


NATURE  AND   USES   OF   CREDIT 


45 


in  order  that  it  may  be  able  to  keep  its  credit  promises  and  so 
make  its  credit  with  its  customers  as  acceptable  as  money  itself. 

That  a  bank  deals  in  credit  may  be  shown  by  a  simple  illus- 
tration. If  a  man  wishes  to  borrow  $1000  and  enjoys  good 
credit,  people  having  confidence  in  his  promise  to  pay  money, 
he  may  write  a  promissory  note  for  $1000  and  discount  it  at  a 
bank,  by  which  is  meant  that  he  sells  it  to  the  bank  for  the  sum 
promised  on  its  face  less  the  interest  charged.  If  the  note  is 
payable  two  months  after  date,  and  the  rate  of  interest  is  six 
per  cent,  the  deduction  on  account  of  interest  will  amount  to 
i  per  cent,  or  $10.  He  may  take  payment  from  the  bank  in 
one  of  two  ways  :  he  may  take  $990  in  cash  ;  or  he  may  leave 
the  currency  with  the  bank  as  a  deposit  and  take  away  a  pass 
book  and  check  book,  drawing  later  upon  the  bank  whenever 
he  finds  it  convenient.  In  the  United  States  and  in  England 
the  latter  method  is  usually  preferred.  Thus,  as  a  rule,  when 
a  bank  discounts  a  note  for  a  customer,  it  at  the  same  time 
increases  its  deposits ;  that  is  to  say,  it  increases  its  indebted- 
ness to  depositors.  The  word  "deposit,"  as  is  shown  by  this 
illustration,  is  a  bank's  promise  to  pay  money  to  an  individual, 
to  a  firm,  or  to  a  corporation.  The  evidence  of  the  promise  is 
merely  an  entry  in  what  is  known  as  a  "pass  book."  Banks 
have  learned  by  experience  that  all  their  depositors  will  not  call 
for  all  the  money  due  them  on  any  one  day,  and  so  are  enabled 
to  make  loans  of  this  character  much  in  excess  of  the  amount 
of  lawful  money  which  they  have  on  hand. 

This  illustration  shows  how  credit  figures  in  the  business 
world.  The  borrower  took  his  own  credit  to  the  bank  and 
exchanged  it  at  a  discount  for  the  credit  of  the  bank,  namely  a 
bank  deposit.  The  borrower  took  to  the  bank  his  own  promise 
to  pay  money ;  he  bore  away  from  the  bank  the  bank's  promise 
to  pay  money ;  in  other  words,  for  the  privilege  of  using  the 
bank's  promise  to  pay  money  to  the  amount  of  $990  this  bor- 
rower paid  the  bank  $10,  or  will  have  paid  it  when  his  note  is 
finally  liquidated.  It  is  by  transactions  of  this  sort  that  the 
banks  of  the  United  States  make  their  profits.  They  are  more 
than  lenders  of  other  people's  money ;  they  lend  their  own 


46  MONEY  AND   CURRENCY 

credit.  If  they  could  not  do  that,  their  transactions  would  be 
much  smaller  in  volume  than  they  now  are,  and  their  profits 
much  less. 

OPERATIONS  OF  A  BANK 

36.  An  analysis  of  each  of  the  operations  of  a  bank  may 
help  the  reader  to  a  clear  understanding  of  the  relation  of  its 
work  to  credit.  A  deposit,  as  has  been  said,  represents  a 
bank's  promise  to  pay  money  to  an  individual.  To  the  bank  it 
is  a  debt,  to  the  depositor  a  credit.  A  man  may  become  a 
depositor  in  three  different  ways:  first,  he  may  turn  over  cash 
to  the  bank;  second,  he  may  give  it  checks  and  other  credit 
instruments  which  he  has  received  from  other  people;  and, 
third,  he  may  give  the  bank  his  own  promissory  note.  In  all 
our  large  cities  the  first  method  of  deposit  is  very  little  used. 
It  has  been  found,  for  example,  that  the  currency  receipts  of 
the  New  York  banks  amount  to  less  than  5  per  cent  of  the 
total  receipts.  Deposits  are  mainly  in  the  form  of  credit  instru- 
ments. From  the  legal  point  of  view  a  deposit  is  a  right  of 
action  against  the  bank  for  money,  but  the  depositor  has  no 
claim  on  the  bank  for  the  identical  pieces  of  currency  which 
he  deposited.  The  cash  or  credit  instruments  left  by  a  depos- 
itor with  a  bank  become  at  once  the  property  of  the  bank.  It 
has  bought  them  with  its  credit  and  may  do  what  it  will  with 
them. 

A  check  is  a  depositor's  order  upon  a  bank  to  pay  money  to 
an  individual,  a  firm,  a  corporation,  or  any  other  legal  person. 
Sometimes  a  depositor,  wishing  the  fact  of  his  credit  at  his 
bank  placed  beyond  question,  gets  a  check  certified;  that  is  to 
say,  the  cashier  writes  or  stamps  "certified  "  across  the  face  of 
it  and  puts  his  signature  below.  When  a  check  has  been  certi- 
fied it  becomes  the  bank's  promise  to  pay  money,  the  depositor's 
account  having  at  once  been  debited  as  if  the  check  had  been 
paid.  A  check,  it  should  be  noticed,  is  not  a  direct  promise  to 
pay  money ;  it  is  an  order  upon  a  bank.  The  law  makes  it, 
however,  the  writer's  implicit  promise  that  the  money  will  be 
paid.  Any  man  obtaining  goods  by  giving  a  check  upon  a  bank 


NATURE  AND   USES   OF  CREDIT  47 

in  which  he  has  no  deposit  account  is  liable  to  prosecution  for 
obtaining  goods  under  false  pretenses.  A  cashier's  check  is 
an  order  on  a  bank  signed  by  the  cashier.  In  essence  it  is  the 
same  as  a  customer's  certified  check. 

A  bank  draft  is  an  order  of  one  bank  upon  another  to  pay 
money  to  an  individual,  a  firm,  or  a  corporation.  Each  bank 
makes  a  practice  of  keeping  deposits  with  banks  in  other  cities 
in  order  that  they  may  be  able  to  "  draw  "  upon  them.  A  draft, 
like  a  check,  is  on  its  face  an  order  to  pay  money,  but  it  is  equiv- 
alent to  a  promise  that  the  money  will  be  paid,  such  being  the 
understanding  between  the  bank  and  the  buyer  of  the  draft. 
The  important  uses  of  bank  drafts  are  explained  in  Chapter  V. 

The  check  and  draft,  since  they  are  based  on  the  bank 
deposit,  are  known  as  "deposit  currency."  They  are  such  a 
convenient  medium  of  exchange  that  business  men  employ 
them  wherever  possible,  for  they  save  the  counting  and  han- 
dling of  money.  If  every  check  and  draft  had  finally  to  be  paid 
with  money,  it  is  evident  that  their  use  would  in  the  long  run" 
effect  no  economy  in  the  use  of  money.  But  liquidation  in 
money  is  usually  not  necessary.  For  illustration,  let  us  sup- 
pose that  A,  B,  and  C  have  deposit  accounts  in  the  same  bank, 
that  A  owes  B  $100,  that  B  owes  C  $100,  and  that  C  owes  A 
$100.  Let  each  pay  his  debt  by  check,  and  let  each  deposit  in 
the  bank  the  check  which  he  receives.  When  the  bank  receives 
A's  check  it  will  debit  A's  account  $100  and  credit  B's  account 
$100 ;  and  so  with  each  check,  all  the  payments  being  effected 
without  the  use  of  any  money.  The  bank,  being  a  common 
debtor  to  several  individuals,  is  able  by  a  mere  transfer  of 
credits  on  its  books  to  cancel  or  liquidate  the  indebtedness 
between  the  individuals. 

Even  if  the  checks  in  the  foregoing  illustration  were  depos- 
ited in  different  banks,  no  money  need  change  hands,  for  the 
banks  in  all  our  cities  have  organized  an  institution  which 
serves  them  as  a  common  debtor  just  as  they  serve  individual 
depositors.  This  institution,  which  is  supported  jointly  by  the 
banks  of  a  city,  is  called  a  "  clearing  house."  It  is  a  compara- 
tively modern  invention.  As  already  shown,  a  bank's  deposits 


48  MONEY  AND   CURRENCY 

consist  largely  of  checks  and  drafts  upon  other  banks  in  the 
same  city.  Before  clearing  houses  were  organized  it  was  neces- 
sary for  each  bank  to  send  messengers  out  to  collect  payment 
of  these.  This  not  only  took  time  and  was  not  safe,  the  mes- 
senger being  often  waylaid  by  footpads  on  his  return  journey, 
but  it  necessitated  the  handling  of  a  great  deal  of  currency. 
Under  the  present  system  each  bank  sends  a  clerk  to  the  clear- 
ing house,  once  or  twice  a  day,  with  all  the  checks  and  drafts 
it  has  received  upon  other  banks.  At  the  clearing  house  the 
claims  of  all  the  banks  upon  each  particular  bank  are  totaled. 
A  bank  which  has  claims  upon  other  banks  greater  than  their 
claims  upon  it  evidently  has  a  net  balance  in  its  favor  and  is 
called  a  "  creditor  bank"  for  that  day.  On  the  other  hand,  a 
bank  whose  claims  are  less  than  the  claims  against  it  at  the  clear- 
ing house  is  a  "debtor  bank."  Each  debtor  bank  sends  to  the 
clearing  house  the  balance  which  is  due  from  it  in  the  shape 
either  of  currency1  or  of  a  check  upon  some  designated  bank 
with  which  the  clearing  house  and  all  the  banks  have  deposit 
accounts.  In  London,  for  example,  banks  pay  clearing-house 
balances  by  check  upon  the  Bank  of  England.  The  balances 
due  each  day  from  the  debtor  banks  are,  of  course,  just  equal 
to  the  balances  due  to  the  creditor  banks,  and  this  amount  is 
paid  to  the  latter  by  the  manager  of  the  clearing  house. 

By  the  simple  machinery  of  the  clearing  house  the  mutual 
indebtedness  of  banks  is  "  cleared  "  with  the  use  of  very  little 
money.  For  example,  in  1904  the  average  daily  clearings  at 
the  New  York  clearing  house,  by  which  is  meant  the  average 
value  of  the  credit  instruments  sent  each  day  for  collection, 
was  $230,000,000,  while  the  average  daily  balance  paid  by  the 

1  To  render  the  handling  of  legal-tender  currency  unnecessary  in  the  settle- 
ment of  debts  between  banks,  the  law  permits  the  use  of  gold  clearing-house 
certificates,  which  are  issued  to  banks  by  the  clearing  house  in  exchange  for  gold 
deposited  with  it.  These  certificates  are  legal  tender  between  banks,  but  cannot 
be  used  by  individuals.  For  many  years  banks  used  for  this  purpose  "  currency 
certificates,"  which  were  bills  in  large  denominations  issued  to  banks  by  the  gov- 
ernment in  exchange  for  United  States  notes.  The  issue  of  currency  certificates 
was  discontinued  by  the  law  of  March  14,  1900,  gold  clearing-house  certificates 
and  gold  certificates  issued  by  the  government  being  substituted. 


NATURE  AND   USES   OF  CREDIT 


49 


banks,  either  in  cash  or  gold  clearing-house  certificates,  was 
only  $i  1,000,000,  or  about  4^  per  cent  of  the  total  indebted- 
ness canceled. 

37.  The   "  book  account "  is  a  general  name  given  to  all 
forms  of  credit  of  which  the  record  is  a  mere  matter  of  book- 
keeping.   It  includes  the  retailer's  accounts  with  his  customers, 
the  accounts  of  wholesalers,  and  those  of  manufacturers.    It 
includes  also  the  accounts  kept  by  operators  on  stock  and  prod- 
uce exchanges,  many  of  them  based  upon  a  mere  nod  of  the 
head  or  crook  of  the  finger  as  the  parties  are  standing  in  the 
midst  of  a  howling  mob.    When  a  man  buys  anything  and  has 
it  charged,  he  buys  it  with    credit   in  the  form  of  a  "  book 
account."    This  kind  of  credit  is  probably  the  means  of  effecting 
more  exchanges  in  this  country  than  any  other  single  form. 
Book  accounts  are  finally  settled  either  by  some  other  form  of 
credit,  as  by  check  or  draft,  or  by  the  payment  of  cash.    In  the 
United  States  accounts  between  merchants  are  usually  settled 
by  check  or  draft.    Most  of  the  accounts  of  retailers  with  indi- 
viduals, especially  in  the  cities,  are  settled  by  check  at  the  end 
of  each  month. 

A  bill  of  exchange,  or  commercial  draft,  is  an  unconditional 
order  in  writing  by  one  person  to  another,  requiring  the  pay- 
ment of  a  certain  sum  of  money.  It  originates  in  a  sale  of 
goods,  the  seller  "  drawing "  upon  the  buyer.  A  foreign  bill 
orders  the  payment  of  money  in  a  foreign  country.  When  the 
drawee  has  accepted  a  bill  it  becomes  his  promissory  note  and 
can  be  negotiated. 

38.  Various  other  forms  of  credit,  such  as  the  postal  money 
order  and  the  money  orders  of  express  and  telegraph  companies, 
serve  as  means  of  payment  in  a  limited  way,  but  it  is  not  neces- 
sary to  describe  them.   We  have  considered  all  the  common 
forms  of  credit  of  limited  acceptability.    In  the  United  States 
nearly  all  large  payments  are  effected  by  the  use  of  some  one  of 
these  forms  of  credit.    It  should  be  noticed  that  some  have  a 
wider  field  of  circulation  than  others,  and  that  none  of  them  is 
universally  acceptable  as  a  means  of  payment.    Among  business 
men  the  bank  draft  and  certified  check  have  almost  a  general 


50  MONEY  AND   CURRENCY 

acceptability,  being  more  acceptable  than  money  itself  for 
the  settlement  of  large  transactions  usually.  Their  accepta- 
bility is  due  to  the  confidence  which  men  have  in  banks.  The 
draft  and  certified  check,  however,  do  not  deserve  the  name  of 
credit  money,  for  they  are  not  used  by  people  generally  and 
are  not  everywhere  accepted  as  a  means  of  payment.  A  man 
cannot  buy  a  railroad  ticket  with  a  certified  check,  and  hotels, 
as  a  rule,  decline  to  cash  drafts  and  checks  of  any  kind  when 
presented  by  strangers. 

All  these  kinds  of  credit,  on  account  of  their  limited  accept- 
ability, have  a  short  life  and  are  generally  presented  for  pay- 
ment soon  after  they  are  received.  It  is  evident,  therefore, 
that  any  increase  in  the  volume  of  these  credit  instruments 
necessitates  an  increase  in  the  reserve  of  money  which  secures 
their  ultimate  payment.  While,  as  we  have  seen,  not  every 
check  is  liquidated  with  money,  yet  experience  has  shown  that 
the  amount  of  legal-tender  currency  in  the  vaults  of  a  bank 
should  increase  in  proportion  as  the  volume  of  its  transactions 
enlarges. 

Two  IMPORTANT  USES  OF  MONEY 

39.  It  is  important  to  note  the  distinction  between  the  use 
of  money  as  a  banking  reserve  and  as  a  hand-to-hand  medium 
of  exchange.  A  dollar  in  a  bank,  serving  as  a  basis  of  credit, 
is  usually  more  efficient  as  a  medium  of  exchange  than  when 
in  circulation  among  the  people.  For  example,  the  manager 
of  a  bank  with  deposits  amounting  to  $500,000  may  find  that 
$100,000  in  money  is  an  adequate  reserve.  Checks  amounting 
to  more  than  $100,000  may  be  drawn  by  the  depositors,  but  he 
is  not  called  on  to  cash  all  of  them  ;  some  are  deposited  by  the 
payees  in  his  bank,  while  others  are  offset  at  the  clearing  house 
by  checks  of  other  banks  deposited  in  his  bank  by  his  regular 
customers.  Thus  a  dollar  in  a  banking  reserve  may  be  made  to 
mediate  several  exchanges  at  the  same  time.  Hence  it  is  neces- 
sary to  distinguish  between  the  use  of  money  as  a  basis  of 
credit  in  banking  reserves  and  its  use  as  a  common  medium 
of  exchange,  or,  to  use  a  popular  expression,  as  "hand-to-hand 


NATURE  AND   USES   OF  CREDIT  51 

money."  The  importance  of  this  distinction  will  become  more 
evident  when  we  analyze  the  circumstances  governing  the 
demand  for  money. 

Owing  to  the  fact  that  in  the  United  States  and  in  many 
other  countries  certain  forms  of  credit  money  are  made  legal 
tender  by  the  law,  these  become  as  efficient  in  banking  reserves 
as  money  itself.  In  the  United  States  the  greenback,  the  Treas- 
ury note  of  1890,  and  the  silver  dollar  and  certificate  are  "  lawful 
money,"  and  are  counted  in  bank  reserves  as  equivalent  to  gold. 

40.  In   the  foregoing   analysis   of    credit   instruments   only 
those  have  been  considered  which  are  particularly  available  as 
a  medium  of  exchange  or  means  of  payment,  thus  serving  in  a 
sense  as  a  substitute  for  money.    It  must  not  be  forgotten  that 
the  primary  purpose  of  credit  is  to  effect  the  transfer  of  capital 
from  the  hands  of  men  who  do  not  want  to  use  it  to  the  hands 
of  those  who  do  want  to  use  it.    To  effect  such  transfer  is  the 
purpose,  indeed,  for  which  banks  exist.    The  use  of  credit  as 
a  common  medium  of  exchange  is  secondary  and  incidental. 
Some  of  the  forms  of  credit  most  useful  as  instruments  for  the 
transfer  of  capital  are  not  well  adapted  to  serve  as  a  medium 
of  exchange.    Such,  for  example,  are  the  mortgage  bonds  of 
corporations,  and  the  interest-bearing  bonds  of  nations,  states, 
counties,  and   cities.    These  are   credit   instruments   and    are 
transferable,  but  their  value  changes  as  the  date  of  maturity 
approaches,  and  a  transfer  of  ownership  is  attended  by  time- 
consuming  formalities.    For  these  reasons  they  do  practically 
no  service  as  a  medium  of  exchange.    As  claims  upon  property 
they  are  an  acceptable  security  for  loans  by  banks  and  so  lead 
to  an  increase  in  the  volume  of  deposit  currency,  but  mortgages 
and  bonds  themselves  seldom   pass   from  hand  to  hand   as  a 
means  of  payment. 

SUPERIORITY  OF  CREDIT 

41.  Credit  is  a  swifter  and  more  convenient  medium  of  ex- 
change than  money.     As  a  tool  of  exchange  money  is  a  great 
time  saver.     Credit,  however,  performs  the  same  service  and 
does  it  with  infinitely  greater  rapidity.    Money  surpasses  barter 


52  MONEY  AND   CURRENCY 

as  the  modern  railroad  "  flyer "  surpasses  the  crawling  canal 
boat,  but  credit  leaps  to  its  task  with  the  swiftness  of  electricity. 
If  the  world  were  stripped  of  its  telegraph  wires,  its  means  of 
communication  would  not  surfer  more  than  would  the  business 
world  if  credit  were  destroyed. 

Almost  all  large  payments  in  this  country  are  made  by 
check  or  draft.  Even  if  a  man  has  the  currency  actually  in 
hand,  he  usually  deposits  it  in  a  bank  and  makes  payments  with 
checks.  Without  the  use  of  credit  a  large  part  of  the  business 
upon  which  the  prosperity  and  welfare  of  this  country  depend 
could  not  be  consummated.  The  government,  for  instance, 
when  it  paid  $20,000,000  for  the  Philippine  Islands  did  so  by 
a  few  strokes  of  the  pen. 

Credit,  being  the  swifter  and  more  convenient  medium  of 
exchange,  is  employed  by  men  to  the  fullest  possible  extent. 
This  proposition  follows  logically  from  what  has  been  said  in 
preceding  paragraphs,  but  the  reader  must  bear  in  mind  that 
the  conditions  determining  the  use  of  credit  differ  in  different 
countries.  For  example,  on  the  continent  of  Europe  credit  is 
less  employed  than  in  England  and  the  United  States.  The 
people  of  the  continent  do  not  use  the  check  book  and  the 
bank  deposit  to  the  same  extent  as  the  people  of  England  and 
the  United  States.  Nevertheless  they  employ  credit  to  some 
extent  at  all  times,  and  their  use  of  it  tends  to  increase  when 
conditions  grow  more  favorable  to  its  employment.  Likewise, 
in  the  United  States,  whenever  confidence  in  business  pros- 
perity is  growing  and  each  man's  prospects  are  improving,  men 
become  more  willing  to  extend  credit  and  promptly  do  so.  As 
a  general  proposition,  therefore,  it  may  be  said  that  the  use 
of  credit  in  any  country  tends  to  increase  whenever  any  cir- 
cumstance broadens  the  confidence  upon  which  it  is  based, 
credit  thereby  becoming  relatively  a  more  important  medium 
of  exchange,  and  money  less  important. 

42.  A  good  credit  system  is  one  which  provides  for  an  auto- 
matic increase  or  decrease  in  the  volume  of  credit  whenever  such 
increase  or  decrease  is  demanded  by  business  conditions.  If  we 
contrast  the  work  done  by  the  two  different  classes  of  credit,  that 


NATURE  AND    USES   OF  CREDIT 


53 


of  limited  acceptability  with  that  of  general  acceptability,  it  is 
easily  seen  that  they  are  born  of  entirely  different  conditions. 
Transactions  between  individuals  who  have  confidence  in  one 
another  are  most  easily  effected  by  the  use  of  credit  having 
limited  acceptability,  Transactions  between  individuals  who 
lack  this  confidence,  or  who  are  not  accustomed  to  bank 
credits,  call  for  the  use  of  money  or  some  form  of  credit  having 
unlimited  acceptability,  i.e.  credit  money.  The  use  of  these 
two  classes  of  credit,  it  will  be  seen,  varies  with  the  degree  of 
confidence  that  exists  in  a  business  community.  In  times  of 
lessening  confidence  there  is  increasing  need  for  credit  money 
to  do  the  work  which  no  longer  can  be  done  by  the  other  forms 
of  credit ;  in  times  of  prosperity,  when  confidence  is  growing, 
the  need  for  "  hand-to-hand  money  "  lessens,  for  a  larger  pro- 
portion of  the  transactions  can  be  effected  by  limited  credit. 
An  ideal  credit  system  would  be  one  which  provided  for  these 
changes  in  the  volume  of  the  different  classes  of  credit  respec- 
tively, without  any  conscious  effort  on  the  part  of  men. 

So  far  as  credit  of  limited  acceptability  is  concerned,  the 
system  now  in  use  in  the  United  States  appears  to  be  ideal. 
There  is  no  restraint  whatever  in  this  country  upon  the  crea- 
tion and  use  of  checks,  drafts,  and  book  accounts.  The  law 
attempts  no  more  than  to  secure  the  redemption  of  such  prom- 
ises when  they  have  once  been  made.  Their  volume  rises  and 
falls  in  harmony  with  the  needs  of  business.  National  banks 
are  required  by  law  to  maintain  a  reserve  of  lawful  money  and 
must  not  suffer  it  to  fall  below  a  fixed  ratio  to  their  deposit 
liabilities  ;  but  these  requirements  are  probably  not  less  severe 
than  the  prudence  of  bankers  would  impose  if  the  law  were 
silent. 

With  respect  to  the  other  class  of  credit,  however,  the  prob- 
lem of  attaining  an  ideal  system  is  more  difficult  of  solution. 
In  some  quarters  it  is  urged  that  the  government  should 
attempt  its  solution  by  the  issue  of  additional  greenbacks  or 
United  States  notes  based  upon  some  sort  of  security.  By 
others  it  is  held  that  the  problem  can  be  solved  only  by  giving 
banks  the  same  freedom  with  regard  to  the  issue  of  bank  notes 


54  MONEY  AND   CURRENCY 

that  they  now  enjoy  with  regard  to  bank  deposits.  Difficult  as 
the  solution  may  be,  it  is  certain  that  the  United  States  will  not 
have  the  best  possible  credit  system  until  an  automatic  expan- 
sion and  contraction  of  the  volume  of  credit  money  has  been 
made  possible.1 

LITERATURE 

MILL,  Political  Economy,  Book  III,  chap,  xi ;  C.  F.  DUNBAR,  Chapters 
in  the  Theory  and  History  of  Banking,  chaps,  i-v ;  WHITE,  Money  and 
Banking,  Book  III,  chaps,  i-iii ;  LAUGHLIN,  Principles  of  Money,  chaps, 
iv-v  ;  H.  D.  MACLEOD,  Theory  of  Credit,  or  Theory  and  Practice  of  Bank- 
ing, passim;  WALTER  BAGEHOT,  Lombard  Street,  —  a  fine  description  of 
the  London  credit  market;  J.  G.  CANNON,  Clearing  Houses  (New  York, 
1900);  STEPHEN  COLWELL,  Ways  and  Means  of  Payment  (Philadelphia, 
1858);  F.  A.  CLEVELAND,  Funds  and  their  Uses  (New  York,  1902),  —  very 
helpful  to  the  beginner  ;  J.  S.  NICHOLSON,  Bankers'*  Money  (London,  1902) ; 
A.  K.  FISKE,  The  Modern  Bank  (New  York,  1904), —  a  practical  description 
of  banking  operations ;  HENRY  THORNTON,  The  Paper  Credit  of  Great 
Britain  (London,  1802),  —  a  classic. 

1  The  credit  system  of  England,  like  that  of  the  United  States,  is  highly  devel- 
oped with  respect  to  credit  of  limited  acceptability,  the  law  making  no  requirement 
with  regard  to  the  amount  of  banking  reserves  ;  but  in  relation  to  credit  of  general 
acceptability  the  English  system  is  defective,  the  Bank  of  England  not  being  per- 
mitted to  issue  a  bank  note  unless  it  is  secured  by  a  deposit  of  gold  equal  in 
amount  to  the  face  of  the  note.  Bank  of  England  notes  are  practically  gold  cer- 
tificates ;  since  their  issue  involves  the  disappearance  of  an  equal  amount  of  gold? 
they  are  a  mere  substitute  for  gold  and  cannot  be  made  to  expand  or  contract  the 
currency  as  business  needs  require. 

In  other  European  countries  note-issuing  banks  are  subject  to  fewer  restric- 
tions than  in  England  or  the  United  States.  The  Bank  of  France,  for  example,  is 
practically  under  no  legal  restrictions  with  regard  to  the  issue  of  notes,  and  is  able 
at  all  times  to  supply  the  country  with  all  the  currency  that  is  needed.  There  is  a 
nominal  limit  to  the  volume  of  notes  that  may  be  issued,  but  this  limit  has  always 
in  the  past  been  raised  when  the  growth  of  the  country  seemed  to  require  an 
increase,  and  will  probably  be  raised  in  the  future.  The  continental  countries  of 
Europe,  however,  make  relatively  small  use  of  so-called  "  deposit  currency,"  not 
because  the  law  hinders,  but  apparently  because  the  people  have  not  discovered 
its  advantages  over  coins  and  bank  bills. 

The  credit  system  of  Canada  is  in  many  respects  ideal.  The  law  leaves  the 
question  of  reserve  to  each  banker's  judgment,  and  permits  a  bank  to  issue  notes 
to  the  amount  of  its  paid-up  capital  stock,  imposing  no  requirements  as  to  security. 
As  a  result  of  this  freedom,  credit  of  both  kinds,  that  of  limited  and  that  of  general 
acceptability,  never  fails  in  Canada  to  satisfy  the  fluctuating  needs  of  the  business 
world. 

The  subject  of  credit  money  is  discussed  at  length  in  Chapter  XV. 


CHAPTER    IV 

CIRCUMSTANCES  AFFECTING  DEMAND  AND  SUPPLY 

43.  The  demand  for  money,  like  the  demand  for  any  other  commodity,  depends 
on  a  variety  of  circumstances.  44.  It  depends  on  the  use  of  credit,  on  the  rapidity 
of  circulation,  and  on  the  total  volume  of  exchanges.  45.  Credit  lessens  the  need  for 
money  as  a  medium  of  exchange  and  as  a  store  of  value.  46.  The  need  for  money 
as  a  basis  of  credit,  —  a  need  which  property  cannot  fill.  47.  Credit  increases  the 
efficiency  of  the  money  supply,  and  thus  increases  the  importance  of  each  money 
unit.  48.  Credit  is  analogous  to  the  "  short  sale  "  of  a  commodity.  49.  The  use 
of  credit  increases  with  the  growth  of  confidence.  Bank  statistics  are  a  clew  to 
the  quantity  of  credit  in  use.  50.  The  more  rapidly  money  circulates,  the  less  the 
rreed  for  money  as  a  store  of  value.  Increasing  rapidity  of  circulation  is  equiva- 
lent to  an  increase  in  the  supply  of  money.  51.  The  demand  for  money  tends  to 
vary  with  the  total  volume  of  exchanges;  it  depends,  therefore,  on  population, 
production  of  wealth,  business  organization,  division  of  labor.  52.  Changes  in 
the  value  of  money  are  not  more  difficult  to  forecast  than  changes  in  the  values 
of  other  goods.  53.  The  supply  of  commodity  money  is  automatically  regulated. 
The  law  of  cost.  54.  The  supply  of  fiat  money  is  regulated  artificially. 

43.  By  demand  for  money  is  meant  the  need  for  money  util- 
ity, that  is  for  wealth  or  value  in  a  form  universally  accept- 
able as  a  medium  of  exchange  or  means  of  payment.  By  supply 
of  money  is  meant  the  quantity  of  money  units  available  for 
use  as  a  medium  of  exchange.  Since  the  utility  of  a  piece  of 
money  varies  directly  with  its  value,  the  supply  of  money  utility 
in  a  country  depends  upon  the  value  of  each  piece  as  well  as 
upon  the  total  supply  of  pieces,  and  tends  to  vary  directly  with 
the  demand,  of  which  it  is  the  product. 

The  foregoing  propositions  have  already  been  explained  and 
illustrated.  It  now  remains  to  consider  certain  important  cir- 
cumstances upon  which  the  demand  for  and  supply  of  money 
depend.  A  similar  investigation  would  be  necessary  if  we  were 
endeavoring  to  analyze  and  account  for  the  value  of  any  other 
good.  When  a  business  man  seeks  to  explain  or  forecast 
changes  in  the  value  of  cotton,  he  is  compelled  to  examine  the 
conditions  upon  which  the  demand  for  and  supply  of  cotton 

55 


56  MONEY  AND   CURRENCY 

depend.  Is  a  larger  acreage  under  cultivation,  so  that  a  larger 
supply  is  forthcoming  ?  Has  the  demand  been  increased  by  the 
discovery  of  new  uses  for  cotton,  or  by  any  improvement  in  the 
economic  condition  of  those  classes  who  are  the  largest  con- 
sumers of  cotton  ?  Is  the  increasing  use  of  some  .substitute 
tending  to  lessen  the  demand  ?  Are  improvements  in  manu- 
facture making  cotton  goods  more  durable  and  so  tending  to 
lessen  the  demand  for  the  raw  article,  since  a  given  supply 
will  last  longer;  or  do  these  improvements,  by  bringing  cotton 
goods  into  greater  favor,  enlarge  the  consumption  so  much  that 
the  demand  for  the  raw  good  is  increased  ?  Calculations  of 
this  sort  are  necessary  to  the  explanation  of  changes  in  the 
value  of  any  commodity.  Money  is  no  exception.  The  value  of 
money,  like  that  of  all  other  things,  is  determined  by  demand 
and  supply,  and  if  we  wish  to  explain  changes  in  it,  we  must 
take  into  consideration  the  conditions  or  circumstances  upon 
which  demand  and  supply  depend. 

In  the  case  of  no  good  is  exact  measurement  of  the  demand 
possible.  The  supply  of  a  good  on  the  market  is  something 
tangible  and  can  often  be  definitely  ascertained  ;  but  the  de- 
mand depends  on  the  inconstant  wants  of  humanity,  and  is 
something  that  cannot  be  measured  or  photographed;  it  can 
be  only  roughly  estimated  by  the  quantity  of  goods  called  for. 
The  conditions  governing  the  supply  are  comparatively  simple, 
while  those  governing  the  demand  are  numerous  and  variable. 
Changes  in  the  value  of  money  cannot  be  understood  and 
explained  without  some  knowledge  of  the  conditions  upon  which 
demand  and  supply  depend. 

44.  Since  the  demand  for  money  is  the  desire  or  need  for  it 
for  use  as  a  medium  of  exchange  and  as  a  store  of  value,  it  is 
evident  that  any  circumstance  affecting  the  volume  of  exchanges 
to  be  made  with  money,  or  affecting  the  need  for  money  as 
a  store  of  value,  must  change  the  demand  for  money,  and  so 
tend  to  change  its  value  and  cause  the  general  level  of  prices 
to  rise  or  fall.  In  order,  therefore,  to  account  for  any  change 
in  the  level  of  prices  we  must  examine  all  the  known  condi- 
tions governing  the  volume  of  exchanges  performed  by  money 


DEMAND  AND   SUPPLY  57 

and  those  determining  its  use  as  a  store  of  value  or  basis  of 
credit.  Upon  analysis  we  find  that  there  are  three  such  con- 
ditions which  are  important:  (i)  the  use  of  credit;  (2)  the 
rapidity  of  the  circulation  of  money ;  (3)  the  total  volume  of 
exchanges. 

RELATION  OF  CREDIT  TO  MONEY 

45.  Credit  tends  to  lessen  the  demand  for  money  for  use 
either  as  a  common  medium  of  exchange  or  as  a  store  of  value. 
That  credit  lessens  the  demand  for  money  and  so  maintains 
prices  at  a  higher  level  than  they  would  otherwise  hold,  will 
be  seen  clearly  if  one  considers  what  would  happen  if  banks 
notified  depositors  that  their  accounts  would  not  be  welcome 
if  they  made  a  practice  of  writing  checks  for  less  than  $100. 
Such  action  by  the  banks  would  compel  us  to  make  all  ordi- 
nary payments  by  means  of  currency  (that  is,  money  or  credit 
money).  Every  man  would  be  obliged  to  carry  much  more  cash 
than  he  does  at  present,  and  the  demand  for  currency  would  in 
consequence  be  enormously  increased.  If  the  supply  of  money 
or  credit  money,  such  as  bank  notes,  were  not  at  the  same  time 
increased  in  a  corresponding  amount,  the  value  of  money  would 
rise  ;  in  other  words,  prices  would  fall. 

A  panic  furnishes  an  excellent  illustration  of  a  change  in  the 
use  of  credit.  In  times  of  panic,  when  every  man  questions  his 
neighbor's  solvency,  that  confidence  which  is  the  foundation  of 
credit  is  shaken,  and  men  are  less  willing  than  usual  to  accept 
promises  of  money  in  lieu  of  money  itself.  As  a  result,  a  panic 
is  always  marked  by  a  startling  fall  of  prices,  which  is  the  result 
of  the  increased  demand  for  money  caused  by  the  disuse  of 
credit.  After  the  panic  is  over  men  slowly  regain  confidence 
in  the  outlook  and  credit  comes  into  use  again,  the  demand  for 
money  decreasing  and  prices  rising.1  In  the  United  States  the 
increased  need  for  money  caused  by  panic  has  usually  received 

1  In  1892  the  amount  of  lawful  money  held  by  the  banks  in  this  country  was 
33  per  cent  of  the  monetary  stock  ;  in  1893,  on  account  of  the  panic  demand  for 
currency,  the  percentage  declined  to  29  ;  in  the  dull  and  quiet  year  of  1894  the 
percentage  rose  to  38,  but  declined  again  during  the  uncertainties  of  1896  to  29. 
See  Report  of  CoDiptroller  of  Currency  for*  1902,  Vol.  T,  p.  41. 


58  MONEY  AND   CURRENCY 

tangible  illustration  by  the  importation  of  gold.  For  example, 
during  the  panics  of  1884,  1890,  and  1893  many  million  dollars' 
worth  of  gold  was  imported  from  Europe.  Most  of  it  was  re- 
exported  after  the  panics  were  over,  the  revival  of  credit  render- 
ing its  presence  here  unnecessary. 

Credit  lessens  the  demand  for  money  to  serve  as  a  store  of 
value  in  two  ways  :  (i)  the  use  of  credit  in  the  form  of  checks, 
drafts,  etc.,  reduces  the  amount  of  currency  which  men  need 
on  hand  in  pocketbooks  or  cash  drawers ;  (2)  credit  in  the  form 
of  credit  money,  being  universally  acceptable  as  a  medium  of 
exchange,  serves  as  a  store  of  value  in  the  pockets  of  the  people 
and  in  the  tills  of  shopkeepers  quite  as  well  as  money  itself. 
Those  forms  of  credit  money  which  are  made  a  legal  tender  for 
the  payment  of  debt  figure  in  banking  reserves  as  a  basis 
for  credit  quite  as  prominently  as  money  itself.  The  national 
banks  of  the  United  States,  for  example,  are  permitted  by  law 
to  count  as  lawful  money  not  only  gold  and  gold  certificates 
but  also  credit  money  in  the  form  of  silver  dollars,  silver  cer- 
tificates, the  United  States  notes  known  as  greenbacks,  the 
Treasury  notes  of  1890,  and  subsidiary  silver.  In  England  the 
notes  of  the  Bank  of  England  are  legal  tender,  and  by  all  banks 
except  the  Bank  of  England  itself  are  used  in  lieu  of  gold.  The 
use  of  credit  money  as  a  basis  for  further  credits  has  been 
greatly  abused,  and  in  the  opinion  of  many  financiers  is  a 
source  of  weakness  and  possible  danger  in  the  monetary  system 
of  the  United  States.  There  can  be  no  doubt,  however,  that 
such  use  of  credit  money  lessens  the  need  for  gold  in  this 
country.1  The  credit  instruments  which  serve  as  a  medium  of 
exchange  are  all  promises  to  pay  money,  and  there  must  always 
be  enough  money  in  existence  to  maintain  confidence  that  these 
promises  will  be  honored  and  redeemed. 

Just  how  much  money  is  needed  to  serve  as  a  basis  for  credit 
it  is  impossible  to  determine  except  by  experience,  for  the 

1  On  November  10, 1904,  the  national  banking  reserve  consisted  of  $484,000,000 
gold  and  $158,000,000  legal  tenders,  i.e.  credit  money;  total,  $642,000,000.  On 
this  as  a  basis  rested  deposit  credits  amounting  to  $3,600,000,000.  The  reserve,  of 
which  24  per  cent  was  credit,  equaled  f*j  per  cent  of  the  net  demand  liabilities. 


DEMAND  AND   SUPPLY  59 

amount  is  not  the  same  in  different  countries  nor  in  the  same 
country  at  different  times.  In  the  United  States  the  basis  for 
credit  consists  of  the  banking  reserves  and  the  $150,000,000  in 
gold  held  by  the  national  Treasury.  The  law  in  this  country 
and  in  some  others  prescribes  the  minimum  reserve  to  be  held 
by  banks,  but  bankers  have  learned  that  this  minimum  is  at 
some  times  more  than  is  necessary  and  at  other  times  much 
less.  How  much  money  should  be  set  aside  as  a  basis  for 
credit?  To  that  question  the  only  correct  answer  is,  Enough 
to  maintain  that  confidence  which  is  the  corner  stone  of  credit. 
That  a  certain  amount  of  money  is  absolutely  necessary  has 
been  abundantly  proved  by  experience. 

46.  The  fact  that  money  is  and  must  ever  be  essential  as  a  basis 
for  credit  needs  emphasis,  for  some  writers,  impressed  by  the 
magnitude  of  the  work  which  credit  does,  have  shown  a  tendency 
to  treat  it  as  if  it  were  an  independent  entity  that  might  some 
day  dispense  with  the  need  of  money  altogether.  These  writers 
hold  that  credit  is  based  upon  wealth  in  general,  and  ignore  its 
dependence  upon  money.  Credit  is  a  contract  to  deliver  not 
property  or  wealth  in  general  but  money.  A  man  who  owns  a 
thousand  bushels  of  wheat,  by  giving  his  promissory  note  and 
pledging  the  wheat  as  security  for  its  payment,  can  obtain 
several  hundred  dollars  in  money  or  secure  the  acceptance  of 
his  note  in  payment  for  goods.  The  'promissory  note,  however, 
is  a  promise  to  pay  money,  not  wheat,  and  would  not  be  accepted 
if  there  were  any  doubt  about  the  money  being  obtained  if  it 
should  be  wanted.  Wheat  is  accepted  as  a  satisfactory  basis  for 
credit  simply  because  wheat  is  marketable  and  can  in  ordinary 
times  be  sold  for  money.  If,  however,  a  man  has  wealth  of  a 
kind  which  cannot  be  readily  sold,  such  as  a  farm,  notwith- 
standing it  has  undoubted  value,  he  finds  difficulty  in  making  it 
the  basis  for  a  loan.  The  fact  that  real  estate  is  not  easily 
marketable  is  responsible  for  that  clause  in  our  National  Bank- 
ing Act  which  forbids  our  national  banks  making  loans  upon 
real  estate.  Good  banking  policy  requires  that  bank  credit 
shall  be  based  upon  those  forms  of  wealth  which  are  quickly 
and  easily  convertible  into  money.  The  notion  that  credit  is 


60  MONEY  AND   CURRENCY 

based  upon  wealth  in  general  was  largely  responsible  for  the 
wild-cat  currency  issued  by  banks  in  this  country  during  the 
first  half  of  the  nineteenth  century.  It  was  argued  that  bank 
notes,  since  they  were  based  on  actual  wealth,  needed  no 
redemption  in  specie  in  order  to  be  good.  English  bankers  put 
forth  the  same  view  during  the  so-called  "restriction  period"1 
(j 797-1821).  Wherever  this  theory  has  been  put  into  practice 
panic  and  destruction  of  credit  have  resulted. 

47.  Credit  increases  the  efficiency  of  money.  This  proposi- 
tion sets  forth  no  new  relation  between  money  and  credit.  It 
merely  presents  in  a  new  way  that  relation  between  credit  and 
the  demand  for  money  which  has  already  been  explained.  As 
we  have  seen,  a  given  sum  of  money,  by  serving  as  the  basis 
for  credit,  may  through  the  agency  of  banks  and  clearing 
houses  give  rise  to  a  volume  of  deposit  currency  several  times 
greater  in  amount,  bankers  having  learned  by  experience  that 
only  a  small  proportion  of  the  checks  written  will  have  to  be 
paid  in  cash.  Each  bank  in  the  ordinary  course  of  business 
receives  checks  drawn  upon  other  banks,  sufficient  in  the  long 
run  to  offset  the  checks  upon  itself  which  fall  into  the  posses- 
sion of  other  banks.  Thus  through  the  agency  of  credit  a  small 
sum  of  money  is  made  the  basis  for  the  settlement  of  a  large 
volume  of  transactions.  Hence  it  can  be  correctly  said  of  credit 
that  it  multiplies  the  capacity  of  money  as  a  medium  of  ex- 
change. Just  as  the  lever  increases  man's  lifting  power,  so 
credit  increases  the  efficiency  of  money.  A  reserve  of  $100,000 
in  a  bank  rests,  as  it  were,  on  the  end  of  the  long  arm  of  the 
lever  and  supports  business  transactions  amounting  to  $500,000 
or  more.  Pursuing  the  analogy,  we  might  say  that  the  fulcrum 
supporting  this  credit  lever  is  confidence,  for  changes  in  confi- 
dence always  necessitate  readjustment. 

It  is  a  mistake  to  suppose,  as  several  writers  appear  to  have 
done,  that  credit  in  any  way  increases  the  supply  of  money. 
Since  credit  instruments  serve  as  a  medium  of  exchange,  credit 
does  increase  the  supply  of  that  medium,  but  it  does  not  and 
cannot  increase  the  supply  of  money.  Credit  merely  increases 

1  See  Chapter  XIV,  section  197. 


DEMAND  AND    SUPPLY  6 1 

the  efficiency  of  money  and  so  lessens  the  need  for  it,  for  it 
enables  a  country  to  get  on  with  a  smaller  supply  of  money 
than  would  be  necessary  if  credit  were  not  used.  Since,  how- 
ever, goods  can  be  bought  with  credit  as  well  as  with  money, 
any  increase  in  the  use  of  credit  means  a  real  increase  in  the 
demand  for  goods,  and  advances  prices  quite  as  much  as  if 
money  itself  had  been  offered.  The  prices  of  goods  are  there- 
fore the  combined  result  of  the  money  and  credit  offered  in 
exchange  for  them.1 

The  truth  of  this  statement,  however,  does  not  imply,  as 
some  writers  seem  to  assume,  that  price  is  independent  of 
money.  The  price  of  a  thing  is  the  amount  of  money  it  is 
exchanged  for ;  it  represents  the  value  of  the  thing  in  money, 
.and  never  anything  else.  Credit,  by  economizing  the  use  of 
money,  merely  increases  its  effectiveness,  enabling  a  given 
supply  to  exchange  more  goods  than  it  could  exchange  if  the 
actual  delivery  of  money  were  demanded.  The  need  for  money 
to  consummate  a  given  volume  of  exchanges  diminishes,  there- 
fore, in  proportion  as  the  use  of  credit  increases. 

Credit  increases  the  importance  of  each  unit  of  the  money 
supply.  This  proposition  may  seem  at  first  paradoxical.  In 
fact  some  writers  upon  money2  have  set  forth  the  opposite  view, 
holding  that  since  the  great  bulk  of  business  transactions  are 
settled  by  means  of  credit,  the  quantity  of  money  in  a  country 
is  of  comparatively  small  consequence.  They  seem  to  regard 
credit  as  a  distinct  entity,  having  an  existence  independent  of 
money  itself.  Even  though  the  population  and  the  production 
of  wealth  increase,  and  the  transactions  of  the  business  world 
grow  in  magnitude,  nevertheless,  according  to  this  view,  credit 
easily  furnishes  all  the  necessary  increase  in  the  supply  of  the 
medium  of  exchange.3  The  reader  should  have  no  difficulty  in 

1  In  a  state  of  commerce  in  which  much  credit  is  habitually  given,  general 
prices  at  any  moment  depend  much  more  upon  the  state  of  credit  than  upon  the 
quantity  of  money.  —  J.  S.  MILL,  Political  Economy^  Book  III,  chap,  xi,  3. 

2  See  Lord  Farrer's  Studies  in  Currency,  p.  188. 

3  And,  conversely,  it  is  held  by  Lord  Farrer  and  some  others  that  any  addition 
to  the  money  supply  can  have  very  little  effect  on  its  value.    Carlile  in  his  Evolution 
of  Modern  Money  (p.  283)  gets  so  far  away  from  the  truth  as  to  think  that  modern 


62  MONEY  AND   CURRENCY 

discovering  the  fallacy  which  underlies  this  view  of  credit  and 
money.  Nobody  knows  to  what  extent  credit  may  multiply 
the  efficiency  of  money,  but  our  ignorance  on  this  point  need 
not  confuse  us  as  to  the  real  nature  of  the  whole  transaction. 
The  thing  to  be  noticed  now  is  the  fact  that  money  is  neces- 
sary as  the  basis  for  all  credit  exchanges,  and  that  the  impor- 
tance of  each  dollar  must  grow  with  every  increase  in  the 
volume  of  credit  transactions  for  which  it  furnishes  the  basis. 
In  a  community  where  no  credit  is  used,  the  loss  of  $100 
means  a  reduction  by  that  amount  in  the  power  of  the  com- 
munity to  make  exchanges  at  one  time  ;  but  if  the  commu- 
nity has  an  expanded  credit  system,  then  the  loss  of  $100  will 
reduce  its  capacity  for  exchanges  by  five  times,  ten  times,  per- 
haps twenty  times  $100.  An  increase  of  the  supply  of  lawful 
money,  such  as  takes  place  when  a  government  prints  legal- 
tender  paper  money,  increases  the  country's  capacity  for  mak- 
ing exchanges  far  beyond  the  amount  of  currency  that  is  added 
to  the  country's  circulation  ;  and  a  decrease  of  the  supply,  such 
as  sometimes  happens  in  the  United  States  when  national  rev- 
enues exceed  expenditures,  lessens  the  purchasing  power  of 
the  people  and  restricts  business  operations  by  an  amount  much 
greater  than  is  indicated  by  the  sum  that  the  government  takes 
out  of  circulation. 

It  is  not  possible  to  employ  credit  as  a  complete  substitute 
for  money.  That  view  of  it  leads  to  the  fallacious  belief  that  we 
may  entirely  dispense  with  the  need  for  money.  Credit  is  rather 
a  device  for  increasing  the  efficiency  of  money,  and  in  doing 
this  it  increases  the  importance  of  each  dollar  in  the  country. 
Hence  changes  in  the  quantity  of  money  in  existence  are  of 
more  consequence  when  credit  is  used  than  when  it  is  not. 

48.  Credit  is  analogous  to  the  sale  of  a  commodity  for  future 
delivery,  and  may  be  called  a  "  short  sale  "  of  money.  A  man 
who  goes  "  short  of  wheat "  is  one  who  makes  a  sale  of  wheat 
when  he  has  none.  He  hopes  to  be  able  to  buy  wheat  at  a 

banking  reserves  are  analogous  to  old-time  "  hoards  "  in  preventing  surplus  gold 
from  acting  on  prices.  The  gold  which  gets  into  banks  usually  has  a  much  greater 
effect  on  prices  than  that  which  people  keep  to  spend. 


DEMAND  AND    SUPPLY  63 

lower  price  before  he  is  called  upon  to  deliver.  Although 
money  is  not  sold  in  the  sense  -that  wheat  is  sold,  nevertheless 
every  purchase  of  a  commodity  is  in  effect  a  sale  of  money,  and 
a  credit  purchase  is  merely  a  short  sale  of  money,  the  buyer 
entering  into  a  contract  to  deliver  money  at  some  future  time. 
Credit  purchases  in  effect  are  equivalent  to  an  increased  offering 
of  money  for  goods,  and  tend  to  lower  the  value  of  money  just 
as  the  speculative  sales  of  wheat  tend  to  depress  its  value. 

It  may  be  objected  that  the  value  of  a  commodity  like  wheat 
is  never  seriously  affected  by  short  sales,  for  every  short  sale 
necessitates  an  offsetting  purchase  at  a  later  date.  In  the  case 
of  money,  however,  perpetual  short  sales  are  possible,  as  is  evi- 
denced by  the  business  of  bankers ;  for  the  greater  part  of 
their  short  sales  of  money  (credit  transactions)  are  offset  by 
others.  In  the  case  of  wheat  the  day  of  settlement  is  never  far 
distant  and  the  stock  of  wheat  available  for  use  by  the  bears  is 
steadily  disappearing  into  the  miller's  hopper.^  But  men  who 
make  contracts  for  the  future  delivery  of  money  face  no  inevi- 
table day  of  reckoning  and  are  perpetually  able  —  unless  their 
excesses  bring  on  panic  —  to  fulfill  their  contracts  with  others 
of  the  same  sort,  thus  permanently  depressing  the  value  of 
money. 

It  is  clear,  therefore,,  that  the  value  of  money  is  actually 
depressed  by  any  increase  in  credit  purchases  of  goods,  the 
buyers  giving  contracts  to  deliver  money  at  a  future  time.  The 
effect  of  purchases  with  credit  is  similar  to  that  of  purchases 
with  money.  We  may  say,  therefore,  that  an  expansion  of 
credit  amounts  to  the  same  thing  as  an  increase  of  the  money 
supply,  and  gives  an  upward  tendency  to  the  prices  of  goods. 
This  statement  must  not  be  taken  to  mean  that  credit  really 
increases  the  supply  of  money.  It  exerts  an  influence  on  the 
value  of  money  solely  by  lessening  the  demand  for  it;  that  is,  by 
increasing  the  efficiency  of  each  dollar  it  renders  fewer  dollars 
necessary  for  the  consummation  of  a  given  volume  of  exchanges. 

49.  Since  credit  is  based  upon  confidence,  the  use  of  credit 
tends  to  increase  as  men  grow  more  confident  with  regard  to 
the  future  of  their  business.  In  good  times,  when  the  demand 


64  MONEY  AND  CURRENCY 

for  commodities  is  steady,  when  the  wheels  of  factories  are  all 
turning,  when  labor  is  fully  employed  at  good  wages,  men  extend 
credit  to  their  customers  readily  and  the  banks  loan  freely. 
In  such  times,  on  account  of  the  growth  of  confidence,  credit 
expands  and  prices  rise.  On  the  other  hand,  if  some  national 
disaster  has  impaired  men's  confidence  in  the  business  outlook, 
if  floods  or  frosts  have  ruined  important  crops,  if  war  is  threat- 
ened, or  if  legislation  hostile  to  certain  industries  is  feared, 
business  men  grow  anxious  about  their  future  obligations  and 
become  more  cautious  in  their  extension  of  credit  to  customers. 
This  shrinking  of  confidence  and  consequent  contraction  of 
credit  sends  a  thrill  through  all  markets  and  the  prices  of  most 
goods  tend  downward. 

It  is  impossible  to  determine  with  any  degree  of  exactness 
the  influence  which  credit  is  exerting  at  any  given  time  upon 
the  prices  of  goods.  Changes  in  prices  may  be  the  result  of 
many  different  factors,  and  we  can  never  attribute  to  any  par- 
ticular one  the  precise  measure  of  its  importance.  With  regard 
to  the  influence  of  credit  we  know  only  that  conditions  exciting 
hope  and  confidence  among  business  men  always  tend  to  increase 
its  use  and  to  stiffen  prices,  and  that  opposite  conditions  unsettle 
prices.  We  can  get  a  fair  estimate  of  the  quantity  of  money  in 
a  country,  but  credit  is  an  imponderable  thing  which  we  can- 
not measure.  There  are  no  statistics  showing  the  volume  of 
transactions  performed  by  credit  at  any  given  time.  To  gather 
such  statistics  would  be  a  most  difficult  and  delicate  task  and 
has  never  been  attempted.1 

Bank  statistics  furnish  the  only  clew  we  have  to  the  volume 
of  credit  transactions.  It  is  a  fair  inference  that  the  volume  of 
deposit  currency  increases  with  the  growth  of  bank  deposits, 
loans,  and  discounts.  The  results  which  follow  the  establish- 
ment of  a  new  bank  show  how  this  comes  about.  When  a  bank 
is  opened  in  a  community  which  has  hitherto  had  no  banking 

1  The  Comptroller  of  the  Currency  in  1895,  assisted  by  Professor  David 
Kinley,  obtained  reports  from  representative  firms  throughout  the  United  States, 
from  which  Professor  Kinley  drew  the  inference  that  possibly  75  per  cent  of  the 
business  transactions  of  the  country  were  effected  by  credit. 


DEMAND  AND    SUPPLY  65 

facilities,  it  becomes  convenient  for  the  people  of  that  com- 
munity to  open  bank  accounts  and  make  many  of  their  pay- 
ments with  checks ;  the  need  for  money  is  correspondingly 
diminished.  If,  therefore,  the  number  of  banks  in  a  country  is 
increasing  more  rapidly  than  the  population  and  the  volume 
of  business  transactions,  we  are  justified  in  concluding  that 
the  use  of  credit  as  a  medium  of  exchange  is  becoming  more 
important. 

A  fair  index  to  the  use  of  credit  is  also  furnished  by  bank 
clearings.  These  do  not  show  the  amount  of  its  own  checks 
received  by  each  bank,  and  are,  therefore,  not  an  accurate  meas- 
ure of  the  full  amount  of  credit  business  done  through  the 
banks.  Yet  gains  in  the  totals  of  bank  clearings,  except  such 
as  may  be  attributed  to  the  normal  growth  of  population  and 
increase  of  production,  may  fairly  be  ascribed  to  changes  in  the 
relative  importance  of  credit  as  a  medium  of  exchange. 

RAPIDITY  OF  CIRCULATION 

50.  The  more  rapidly  money  circulates,  the  less  the  demand 
for  it  to  serve  as  a  store  of  value,  and  hence  the  less  its  value. 
The  relation  of  what  is  commonly  called  the  rapidity  of  cir- 
culation of  money  to  its  value  can  best  be  explained  by  an 
illustration.  Let  us  suppose  that  in  New  York  City  the  total 
volume  of  exchanges  effected  each  day  by  actual  transfer  of 
cash  amounts  to  $200,000,000  and  that  the  amount  of  cash  in 
that  city  (not  counting  that  in  bank  reserves)  is  $100,000,000. 
It  is  evident  that  on  the  average  each  dollar  performs  two 
exchanges  each  day.  Suppose  now  that  in  Chicago  the  daily 
exchanges  in  which  currency  is  used  foot  up  $100,000,000,  and 
that  the  supply  of  cash  outside  the  banks  is  only  $25,000,000. 
Evidently  in  Chicago  each  dollar  is  effecting  an  average  of  four 
exchanges  daily,  and  we  can  say  that  money  circulates  more 
rapidly,  or  changes  hands  more  often,  in  Chicago  than  in  New 
York,  and  therefore  that  less  money  would  be  needed  in  Chi- 
cago than  in  New  York  to  consummate  the  same  volume  of 
exchanges  during  a  given  period  of  time. 


66  MONEY  AND   CURRENCY 

The  reader  should  notice  that  the  rapidity  of  circulation  does 
not  lessen  the  need  for  money  for  use  as  a  medium  of  exchange 
at  any  particular  moment.  That  need  depends  upon  the  volume 
of  exchanges  which  men  wish  to  perform  with  money  at  the 
given  moment.  In  the  phrase  " rapidity  of  circulation"  the 
element  of  time  is  necessarily  implied,  for  there  can  be  no 
circulation  of  money  except  during  a  period  of  time.  In  what 
way,  then,  is  the  rapidity  of  circulation  related  to  the  demand 
for  money?  It  lessens  the  need  for  money  as  a  store  of  value. 
In  a  community  where  each  dollar  performs  on  the  average  four 
exchanges  a  day,  money  is  more  actively  employed  than  in  a 
community  where  a  dollar  changes  hands  only  once  a  day;  in 
the  former  at  any  given  moment  the  proportion  of  the  money 
supply  lying  unused  in  people's  pockets  is  smaller  than  in  the 
latter.  Hence  the  demand  for  money  decreases  as  the  circula- 
tion of  money  becomes  more  rapid. 

As  a  factor  causing  changes  in  the  value  of  money  the  rapid- 
ity of  circulation  is  not  of  great  importance,  nor  is  its  relation 
to  money  in  any  way  unique  or  peculiar.  It  is  not  important 
for  the  reason  that  it  is  not,  like  credit,  subject  to*  great  varia- 
tions. In  any  community  it  is  a  pretty  constant  quantity.  The 
frequency  with  which  a  dollar  changes  hands  clearly  depends 
on  the  circumstances  which  determine  how  much  money  it  is 
convenient  for  people  to  keep  in  store  for  future  use.  These 
circumstances  are  not  the  same  in  different  communities,  but 
they  do  not  vary  much  from  day  to  day  or  from  season  to  sea- 
son in  the  same  community.  In  a  rural  district,  for  example, 
with  the  nearest  bank  ten  miles  away,  and  the  check  book 
unfamiliar,  the  leather  wallet  of  the  average  farmer  naturally 
holds  more  money  than  the  purse  of  the  average  city  man. 
The  farmer's  hired  man  stows  away  his  wages  in  his  trunk, 
keeping  the  same  coins  and  bills  for  months  in  anticipation 
of  the  holiday  when  he  can  go  to  town  and  buy  a  new  suit  of 
clothes;  whereas  the  city  workman  seldom  has  in  his  possession 
more  than  a  week's  wages,  all  else  having  been  spent  or  put 
into  a  savings  bank  or  a  building  and  loan  association.  The 
conditions  of  country  life  oblige  men  to  keep  on  hand  larger 


DEMAND  AND   SUPPLY  67 

sums  of  money  than  are  needed  by  men  in  towns  and  cities. 
That  is  all  that  is  meant  by  the  statement  that  the  rapidity  of 
circulation  of  money  is  greater  in  the  city  than  in  the  country. 

To  consider  in  detail  all  the  conditions  governing  the  rapid- 
ity of  circulation  of  money  would  be  a  long  and  profitless  task  ; 
it  would  be  merely  an  inquiry  into  the  conditions  governing  the 
need  for  a  store  of  money  utility.  This  need  is  not  subject 
to  sudden  variations,  being  fixed  by  habit  and  environment. 
Furthermore  it  is  not  something  peculiar  to  money.  If  ten 
farmers  use  a  grindstone  in  common,  the  " circulation"  of  grind- 
stones in  that  community  is  more  rapid  than  if  each  farmer 
owned  one,  and  the  need  or  demand  for  them  is  correspondingly 
less.  So  the  roller  towel  of  the  frontier  hotel,  by  the  rapidity 
of  its  circulation,  diminishes  the  demand  for  towels;  and  Mr. 
Dooley's  "  pot  of  stirabout,"  offering  its  utility  to  the  entire 
family  at  the  same  instant,  lessens  the  demand  for  pots  and 
dishes  in  the  land  where  it  is  popular.  These  homely  illustra- 
tions suffice  to  show  that  money  is  not  the  only  commodity 
whose  value  is  influenced  by  the  rapidity  of  its  circulation. 

The  rapidity  of  circulation  of  money,  or  the  efficiency  of 
money,  is  usually  described  as  if  it  were  a  factor  influencing 
the  supply  of  money.  Francis  A.  Walker,  for  example,  says 
that  the  supply  of  money  "is  composed  of  two  factors, — the 
amount  of  money  and  the  rapidity  of  circulation."1  Mr.  Mill 
expresses  the  same  idea  as  follows  :  "  The  value  of  money  is 
inversely  as  its  quantity  multiplied  by  what  is  called  the  rapidity 
of  circulation.  .  .  .  The  quantity  of  money  laid  out  is  not  the 
same  thing  with  the  quantity  in  circulation."2  This  treatment 
of  the  subject  gives  the  student  an  impression  that  the  supply 
of  money  is  in  some  way  different  from  the  supply  of  any  other 
commodity,  and  is  apt  to  confuse  him.  Any  increase  in  the 
efficiency  of  money,  whether  the  result  of  credit  or  of  the  rapid- 
ity of  circulation,  increases  the  volume  of  transactions  which 
can  be  effected  by  a  given  supply  of  money,  and  so  can  be 
viewed  as  equivalent  to  an  increase  in  the  supply  of  money 

^•Political  Rconomy  (advanced  course),  p.  131. 
*  Political  Economy  i  Book  III,  chap. 


Vlll. 


68  MONEY  AND  CURRENCY 

itself,  and  as  having  a  similar  effect  on  prices.  But  the  change 
in  prices  is  not  the  result  of  any  change  in  the  supply ;  it  is 
the  product  of  the  diminished  need  for  money.  As  the  effi- 
ciency of  any  tool  is  increased,  the  need  for  such  tools  for  a 
given  amount  of  service  is  reduced.  For  example,  if  a  railroad 
adopts  an  improvement  which  increases  the  speed  of  its  loco- 
motives 10  per  cent,  unless  its  business  also  increases  its  need 
for  locomotives  will  be  reduced  by  10  per  cent.  The  increase 
in  locomotive  efficiency  would  be  equivalent  in  effect  to  an 
increase  in  the  supply  of  locomotives. 

Some  writers  attribute  too  much  importance  to  the  tendency 
of  money  to  vary  its  rapidity  of  circulation  as  the  demand 
varies.  They  hold  that  an  increase  in  the  demand  for  money  is 
usually  attended  by  increased  efficiency  of  the  existing  supply, 
so  that  no  actual  increase  of  the  supply  is  necessary.  It  is 
quite  possible  that  dollars  change  hands  more  often  during  a 
panic  than  in  ordinary  seasons,  but  the  increase  in  the  rapidity 
of  circulation  of  money  during  a  panic  is  never  equal  to  the 
increase  in  the  demand  for  money,  as  is  evidenced  by  the  fall 
of  prices  always  accompanying  a  panic.  During  ordinary  times 
there  is  no  reason  for  believing  that  changes  in  the  demand  for 
money  are  offset  to  any  extent  whatever  by  changes  in  the 
rapidity  of  money's  circulation.  That  is  dependent  upon  the 
habits  and  environment  of  the  people,  from  the  influence  of 
which  escape  is  not  easy.1 

VOLUME  OF  EXCHANGES 

51.  The  demand  for  money  tends  to  vary  directly  with  the 
total  volume  of  exchanges.  If  credit  and  the  rapidity  of  circu- 
lation of  money  were  constant  quantities,  always  holding  the 
same  relation  to  the  quantity  of  money,  the  demand  for  money 
would  increase  in  exactly  the  same  proportion  as  the  volume  of 
exchanges.  But  the  two  factors  named  are  not  constant,  credit 

1  The  fact  that  credit  money  is  almost  exclusively  used  among  the  people  in  the 
United  States  does  not  affect  the  conclusions  reached  in  this  section.  The  more 
rapid  the  circulation  of  credit  money,  the  smaller  the  quantity  of  it  needed  to 
mediate  a  given  volume  of  exchanges. 


DEMAND  AND   SUPPLY  69 

in  particular  being  subject  to  great  changes.  Changes,  how- 
ever, in  the  use  of  credit  and  in  the  rapidity  of  circulation  have 
no  causal  relation  to  the  volume  of  exchanges,  and  there  is 
no  reason  for  supposing  that  such  changes  tend  to  prevent  an 
increase  in  the  volume  of  exchanges  from  increasing  the  demand 
for  money.  The  proportion  of  credit  transactions  to  money 
transactions  may,  on  account  of  changes  in  confidence,  vary 
widely  within  short  periods  of  time,  but  in  the  long  run  that 
proportion  depends  on  custom  and  on  the  existence  of  such 
credit  facilities  as  banks  and  clearing  houses.  In  any  given 
country  year  after  year  the  relative  importance  of  credit  as  a 
medium  of  exchange  may  gradually  increase,  but  it  cannot  be 
assumed  that  such  increase  is  sufficient  to  handle  the  yearly 
additions  to  the  volume  of  exchanges,  due  to  the  increase  in 
wealth  and  population. 

Experience,  indeed,  has  repeatedly  demonstrated  that  changes 
in  the  use  of  credit  and  in  the  rapidity  of  circulation  do  not 
keep  the  value  of  money  from  being  affected  by  an  increase  in 
the  volume  of  exchanges.  Between  1810  and  1850  the  pur- 
chasing power  of  money  (gold  and  silver)  rose  all  over  the 
world,  the  large  increase  in  the  world's  business  during  this 
period  having  been  accompanied  by  very  small  additions  to  the 
world's  supply  of  gold  and  silver.  The  same  thing  happened 
between  1873  and  1897,  during  which  period,  despite  an 
increase  in  the  world's  stock  of  gold,  prices  in  gold-standard 
countries  fell  some  50  per  cent,  marking  an  increase  of  nearly 
100  per  cent  in  the  value  of  gold.  We  may  conclude,  there- 
fore, that  as  the  volume  of  exchanges  increases,  the  demand  for 
money  tends  to  increase,  although  not  necessarily  in  the  same 
proportion. 

The  volume  of  exchanges  in  any  country  depends  on  the  num- 
ber of  people,  on  their  productive  capacity,  on  the  organization 
of  business,  and  on  the  extent  to  which  the  division  of  labor  has 
been  carried.  The  demand  for  money,  therefore,  tends  to  vary 
whenever  changes  take  place  in  any  of  these  factors. 

If  there  were  no  changes  in  the  habits  of  the  people  from 
generation  to  generation,  if  the  sons  carried  on  business  exactly 


70  MONEY  AND   CURRENCY 

as  their  fathers  did  before  them,  producing  the  same  amount 
of  wealth  per  capita,  making  payments  in  the  same  way  and 
always  keeping  at  hand  about  the  same  amount  of  currency, 
then  we  might  say  that  the  demand  for  money  increases  part 
passu  with  the  population.  Ignorant  of  the  various  conditions 
upon  which  the  demand  for  money  depends,  people  often 
assume  that  the  value  of  money  would  be  stable  if  only  the 
supply  were  increased  at  the  same  rate  as  the  population. 
Certain  politicians  in  the  United  States  have  recommended 
legislation  intended  to  bring  about  an  artificial  regulation  of 
the  money  supply  on  this  basis.  This  view  of  the  subject  over- 
looks other  factors  in  the  demand  for  money  quite  as  important 
as  population,  and  is  therefore  crude  and  unscientific.  Changes 
in  population  calling  for  an  increase  in  money  may  be  offset 
by  changes  in  other  factors  tending  to  lessen  the  demand  for 
money.  The  so-called  "  per  capita  test  "  of  the  money  supply  is 
therefore  quite  worthless. 

The  demand  for  money  tends  to  vary  with  the  production  of 
wealth.  In  a  community  which  produces  very  few  goods  the 
total  volume  of  exchanges  cannot  be  large,  and  in  such  a  com- 
munity the  need  for  money  will  be  comparatively  small.  It 
is  evident  that  if  the  productive  power  of  that  community  is 
doubled,  each  man  will  have  a  larger  quantity  of  goods  to  sell, 
the  volume  of  exchanges  will  be  increased,  and  the  need  for  a 
medium  of  exchange  will  be  enlarged.  At  present  our  indus- 
trial society  is  so  organized  that  practically  all  goods  are  made 
to  be  sold.  They  are  sold  for  money  or  for  credit.  It  follows 
that  the  need  for  a  medium  of  exchange  must  increase  as  the 
quantity  of  goods  produced  and  exchanged  increases. 

We  cannot  assume,  however,  that  the  quantity  of  wealth 
produced  in  the  country  is  by  itself  an 'accurate  index  of  the 
amount  of  money  needed  to  maintain  a  stable  level  of  prices. 
Even  if  we  assume  that  no  modifications  are  taking  place  in 
the  machinery  of  exchange,  and  that  year  after  year,  on  the 
average,  goods  are  bought  and  sold  the  same  number  of  times 
before  they  reach  the  final  consumer,  yet  it  would  not  follow 
that  the  demand  for  money  would  increase  equally  with  the 


DEMAND  AND   SUPPLY  jl 

production  of  wealth.  As  production  enlarges  there  is  an  in- 
crease in  the  quantity  of  goods  exchanged  and  in  the  average 
size  of  each  transaction.  The  increase  in  the  magnitude  of 
transactions  naturally  leads  to  a  larger  use  of  credit,  for,  as 
already  shown,  the  most  useful  sphere  of  credit  is  in  the  field 
of  large  exchanges.  The  expansion  of  credit  makes  it  possible 
for  the  community  to  effect  the  larger  volume  of  exchanges 
without  any  corresponding  increase  in  the  supply  of  money. 
The  production  of  wealth  is  only  one  factor  in  the  demand  for 
money.  It  is  important,  but  it  must  always  be  considered  in 
connection  with  that  other  important  factor,  credit. 

Improvements  in  business  organization  which  reduce  the 
number  of  times  a  good  is  bought  and  sold  in  its  journey  from 
producer  to  final  consumer  reduce  the  total  volume  of  exchanges 
and  so  tend  to  lessen  the  need  for  money.  Such  improvements 
are  constantly  taking  place.  During  the  last  twenty  years  of 
the  nineteenth  century,  a  period  marked  by  the  consolidation 
of  small  business  enterprises  into  large  corporations,  many 
middlemen  were  dispensed  with.  Business  changes  of  this  sort, 
greatly  reducing  the  number  of  exchanges  made  in  market- 
ing goods,  naturally  lessen  the  demand  for  a  medium  of 
exchange,  and  must  be  taken  into  account  when  the  relation 
of  the  value  of  money  to  the  production  of  wealth  is  under 
consideration. 

On  the  other  hand,  the  increasing  division  of  labor,  which  is 
a  feature  of  modern  industrial  evolution,  has  a  tendency  to 
increase  the  need  for  a  medium  of  exchange.  Men  in  middle 
life  recall  the  time  when  labor  was  employed  in  ways  very  dif- 
ferent from  those  in  which  it  is  now  employed,  for  the  last 
twenty-five  years  have  been  remarkable  for  the  improvements 
made  in  the  application  of  labor  to  the  production  of  goods. 
Adam  Smith  doubtless  felt  that  the  limit  had  been  reached 
when  he  described  the  manufacture  of  pins  and  showed  how  it 
involved  one  hundred  and  sixty  different  processes  and  gave 
employment  to  one  hundred  and  sixty  sets  of  workers.  But 
since  his  day,  on  account  of  the  great  variety  of  mechanical 
appliances  that  have  been  invented,  the  division  of  labor  has 


72  MONEY  AND   CURRENCY 

been  applied  to  numerous  articles  of  commerce,  so  that  at  the 
present  time  it  is  difficult  to  name  any  commodity  which  is 
the  product  of  a  single  worker.  The  shoemaker  buys  the  shoes 
he  wears,  the  watchmaker  the  watch  he  carries.  The  black- 
smith, whose  father  made  his  own  nails  and  horseshoes,  now 
finds  it  more  economical  to  buy  these  and  all  the  rest  of  his 
equipment.  Fifty  years  ago  it  was  the  ambition  of  many  a 
farmer  to  raise  upon  his  own  farm  all  that  he  and  his  family 
consumed ;  his  fields  and  his  stock  furnished  him  with  food ; 
the  wool  on  his  sheep  was  made  into  clothing  by  the  spinning 
wheel  and  weaving  frame  in  his  house.  Now  the  farmer,  espe- 
cially in  western  Europe  and  the  United  States,  concentrates 
his  energies  upon  a  few  crops,  and  gets  by  exchange  most  of 
those  comforts  and  necessaries  of  life  which  his  father  used 
to  produce.  Such  industrial  modifications  evidently  tend  to 
increase  the  need  for  money,  for  they  increase  the  number  of 
exchanges  that  accompany  a  given  production  of  wealth.1 

52.  We  have  now  finished  our  analysis  of  the  factors  influ- 
encing the  demand  for  money,  and  have  found  that  in  order  to 
account  for  changes  in  the  value  of  money  from  causes  affect- 
ing the  demand  we  must  consider  the  way  in  which  goods  are 
produced  and  marketed,  the  growth  of  population,  the  produc- 
tion of  wealth,  the  use  of  credit,  and  the  rapidity  of  money's 
circulation.  The  reader  may  well  ask,  How  out  of  this  maze  of 
conflicting  forces  can  one  select  those  which  at  any  given  time 
are  predominant?  And  the  manifest  impossibility  of  the  task 
may  lead  him  to  the  conclusion  that  the  value  of  money  is 
more  difficult  of  comprehension  and  explanation  than  the  values 
of  goods  in  general.  Such  a  conclusion  would  be  an  error. 
The  values  of  all  goods  depend  upon  demand  and  supply,  and 
there  is  none  for  which  the  human  demand  is  not  subject  to  a 
bewildering  variety  of  influences.  The  demand  for  money  is 
not  peculiar  in  this  respect,  nor  are  changes  in  the  value  of 
money  more  difficult  to  explain  or  forecast  than  are  changes  in 
the  values  of  other  commodities. 

1  In  David  A.  Wells'  Recent  Economic  Changes  the  reader  will  find  many 
interesting  illustrations  of  the  point  made  in  this  paragraph. 


DEMAND  AND   SUPPLY  73 

The  reader  must  not  suppose  that  the  purpose  of  our  analysis 
has  been  to  discover  what  is  the  value  of  money.  That  we 
always  know,  for  it  is  revealed  by  the  prices  at  which  goods 
sell.  Leaving  the  advantages  of  correct  theory  aside,  there  are 
two  practical  advantages  to  be  derived  from  a  clear  conception 
of  the  nature  of  the  demand  for  money.  In  the  first  place, 
business  men,  whose  paramount  interest  is  the  prices  of  goods, 
are  certain  to  make  costly  blunders  in  their  forecast  of  price 
changes  unless  they  inquire  into  the  forces  acting  upon  the 
value  of  money  as  carefully  as  they  do  into  those  which  affect 
the  values  of  particular  goods.  In  the  second  place,  our  analysis 
of  the  factors  affecting  the  demand  for  money  proves  that  these 
are  so  potent  and  varied  that  it  is  not  wise  to  attempt,  as  has 
sometimes  been  attempted  in  the  past,  to  regulate  the  value 
of  money  by  some  simple  legislative  device  aiming  at  artificial 
interference  with  the  demand  or  arbitrary  control  of  the  supply. 

SUPPLY  OF  MONEY 

53.  The  conditions  governing  the  supply  of  money  are  much 
simpler  than  those  governing  the  demand.  When  a  commodity 
like  gold  or  silver  is  used  as  money,  free  coinage  being  per- 
mitted, the  supply  in  the  long  run  depends  on  the  cost  of  pro- 
duction. The  supply  of  fiat  money  depends  on  the  will  of  the 
government  issuing  it. 

When  gold  (or  silver,  or  any  other  commodity)  is  freely  used 
as  money,  the  supply  of  money  in  a  country  is  automatically 
regulated  in  such  a  manner  as  to  keep  the  value  of  gold  practi- 
cally the  same  in  all  countries  of  the  world.  This  automatic 
regulation  of  the  supply  is  one  of  the  chief  advantages  of  com- 
modity money.  It  is  effected  through  the  medium  of  price. 
When  a  country  using  gold  as  money  has  a  larger  supply  pro- 
portionate to  its  needs  than  other  countries,  the  value  of  gold 
in  that  country  falls  below  its  level  in  other  countries  and  the 
prices  of  goods  there  are  correspondingly  higher.  Sales  to  for- 
eigners decrease  and  purchases  from  foreigners  increase  until  a 
balance  of  indebtedness  is  created  which  compels  an  exportation 


74  MONEY  AND  CURRENCY 

of  gold  in  settlement.  The  loss  of  gold,  by  reducing  the 
supply  of  money,  raises  the  value  of  money  and  lowers  the 
level  of  prices  in  the  country  losing  it,  while  tending  to  raise 
prices  in  the  countries  to  which  it  has  gone.  By  this  simple 
process,  gold  always  seeking  those  markets  where  its  purchas- 
ing power  is  greatest,  the  supply  of  money  in  those  countries 
using  gold  as  money  is  automatically  adjusted  so  that  its  value 
in  all  tends  to  be  the  same.  A  country  is  said  to  have  "too 
much  money  "  when  its  prices  are  above  the  level  of  prices  in 
other  gold-standard  countries,  and  "  too  little  money  "  when 
its  price  level  is  below  that  of  other  countries ;  for  in  the  one 
case  gold  buys  less  in  that  country  than  elsewhere,  and  in  the 
other  case  more.  In  either  case,  by  the  export  or  import  of 
gold,  a  readjustment  is  effected  without  conscious  effort  on  the 
part  of  men.  What  is  said  here  of  gold  applies  with  equal 
truth  to  silver  in  all  countries  where  it  is  freely  coined  into 
money.1 

This  automatic  regulation  of  the  supply  of  metal  money,  it 
should  be  observed,  determines  only  the  relative  money  supply 
of  a  country,  and  not  the  absolute  supply ;  it  determines  the 
share  of  money  which  each  country  shall  have,  but  has  no  con- 
trol over  the  total  quantity  to  be  distributed  among  the  various 
countries  of  the  earth.  This  is  determined  by  a  law  also  auto- 
matic and  equally  effective  in  the  long  run,  but  less  certain  of 
instant  application  and  less  easy  of  comprehension.  It  is  the 
law  of  cost,  and  applies  to  all  commodities,  including  gold  and 
silver,  in  precisely  the  same  way.  Briefly  stated  this  law  is  as 
follows  :  The  supply  of  a  commodity  produced  under  conditions 
of  free  competition  is  so  regulated  that  its  value  in  the  long  run 
coincides  with  the  cost  of  producing  it  under  the  most  unfa- 
vorable conditions.  Capital  and  labor  gravitate  toward  those 
industries  which  yield  highest  profits.  If  any  commodity  is 
selling  at  a  price  yielding  extraordinary  profits,  additional  capi- 
tal and  labor  are  attracted  to  that  industry,  the  supply  is 
increased,  and  the  value  forced  down.  On  the  other  hand,  if 

1  The  international  movements  of  the  precious  metals  are  explained  more  fully 
in  Chapter  V. 


DEMAND  AND   SUPPLY 


75 


for  any  reason  the  value  of  an  article  falls  below  its  cost, 
producers  curtail  production,  the  supply  is  reduced,  and  the 
value  rises. 

The  truth  of  the  law  of  cost  in  the  case  of  most  commodities, 
especially  those  produced  under  well-known  conditions,  is  so 
clear  and  well  established  among  business  men  that  it  needs  no 
demonstration  or  illustration.  Its  application  to  a  metal  like 
gold,  however,  is  not  perfectly  evident  and  is  not  generally 
understood.  Nevertheless  the  value  of  gold,  like  that  of  any 
other  good,  tends  to  correspond  with  the  cost  of  production, 
and  the  only  check  upon  any  large  increase  in  the  supply  of 
gold  —  and  consequent  fall  in  its  value  — is  the  difficulty  or  cost 
attending  its  production.  A  rise  in  the  value  of  gold  causes 
an  increase  in  the  profits  of  gold  mining,  and  men  make  greater 
and  greater  efforts  to  produce  gold.  On  account  of  the  uncer- 
tainties of  gold  mining  these  efforts  are  not  always  immediately 
rewarded,  but  the  history  of  gold  production  in  the  past  shows 
that  sooner  or  later  a  rise  in  the  value  of  the  metal  has  been 
followed  by  a  steady  increase  in  the  world's  annual  output,  and 
that  a  fall  in  the  value  of  gold,  since  it  lessened  the  miner's  com- 
pensation, has  caused  the  abandonment  of  the  poorest  mines  and 
so  reduced  the  output.  So  the  world's  stock  of  gold  available 
for  monetary  use  tends  to  increase  more  rapidly  when  the  value 
of  gold  is  rising  than  when  it  is  falling.  These  changes  in  the 
supply  of  gold  tend  to  keep  it  at  a  value  which  will  yield  the 
gold  miner  only  the  average  rate  of  profit.1 

54.  The  supply  of  fiat  money  is  regulated  arbitrarily  by  the 
government,  and  its  advocates  hold  that  its  value  may  there- 
fore be  kept  stable  at  any  desired  level,  so  that  the  prices  of 
goods  need  never  be  affected  by  changes  in  the  value  of  money. 
The  world's  experience  with  fiat  money  and  various  plans 
recently  urged  for  adoption  are  described  in  Chapter  XL 

In  conclusion,  let  the  reader  bear  in  mind  the  important  dis- 
tinction between  the  supply  of  money  utility,  or  value,  and  the 
supply  of  money  units.  The  supply  of  money  value  cannot  be 

1  The  peculiar  conditions  governing  the  production  and  value  of  the  precious 
metals  are  discussed  in  Chapter  X. 


76  MONEY  AND   CURRENCY 

affected  by  any  arbitrary  act  of  men,  and  is  independent  of 
the  supply  of  money  units,  for  it  is  the  product  of  the  demand 
or  need  for  money  utility,  and  is  always  sufficient  to  satisfy 
that  demand.  If  money  were  the  only  medium  of  exchange 
employed,  there  being  no  form  of  credit  in  use,  the  value  of 
each  money  unit  would  vary,  other  conditions  remaining  the 
same,  exactly  in  proportion  as  the  supply  of  money  varied,  for 
the  value  of  the  whole  supply  would  always  just  equal  the  need 
for  money  utility.  But  in  a  country  employing  credit  as  a 
medium  of  exchange  the  effect  of  an  alteration  in  the  supply  of 
money  cannot  be  foreseen,  for  no  one  can  know  how  much 
it  will  affect  the  demand  through  causing  a  contraction  or 
expansion  of  credit. 

LITERATURE 

MILL,  Political  Economy,  Book  III,  chaps,  viii,  ix,  xi,  xii,  and  xxi ; 
WALKER,  Money,  Part  I,  chaps,  iii  and  iv ;  KINLEY,  Money,  chaps,  viii 
and  ix;  THORNTON,  Paper  Credit,  chap,  iii;  DAVID  A.  WELLS,  Recent 
Economic  Changes,  passim. 


CHAPTER  V 
DOMESTIC  AND  FOREIGN   EXCHANGE 

55.  The  mechanism  by  means  of  which  payments  are  made  between  communi- 
ties within  the  same  country.  56.  Reasons  why  New  York  exchange  is  every- 
where acceptable  in  business  circles.  57.  Conditions  which  lead  to  shipments  of 
currency,  and  the  limits  between  which  the  "  price  "  of  New  York  exchange  may 
fluctuate.  58.  In  the  long  run  the  supply  of  New  York  exchange  in  any  given 
community  is  about  equal  to  the  demand.  The  seasonal  movement  of  currency. 
59.  How  changes  in  the  rate  of  interest  and  in  prices  maintain  an  equilibrium  be- 
tween the  demand  for  New  York  exchange  and  its  supply.  60.  International 
exchanges  are  governed  by  the  same  principles  as  domestic  exchanges.  61.  Lon- 
don exchange  as  acceptable  throughout  the  world  as  New  York  exchange  is  within 
the  United  States.  62.  The  origin  of  sterling  bills.  Sight  exchange,  short  bills, 
long  bills,  cables.  63.  The  par  of  exchange  and  the  significance  of  rising  and  fall- 
ing rates.  64.  The  cost  of  gold  shipments.  The  gold  points.  65.  The  supply  of 
and  demand  for  sterling  exchange  is  due  to  a  country's  visible  and  invisible  trade. 
66.  The  invisible  trade  in  securities  and  other  forms  of  debt  as  important  as  the 
trade  in  goods.  The  operations  of  arbitrage  houses.  67.  How  investments  affect 
the  rates  for  foreign  exchange.  Bank  balances.  68.  Miscellaneous  items.  Foreign 
travel  and  ocean  freights.  69.  Gold  movements  are  the  result  not  of  the  so-called 
balance  of  trade  but  of  a  balance  of  indebtedness  created  by  international  differ- 
ences in  prices  and  the  rate  of  interest. 

55.  Before  the  reader  can  intelligently  take  up  the  consider- 
ation of  the  practical  problems  involved  in  the  use  of  money  as 
a  medium  of  exchange  it  is  necessary  that  he  have  some  idea 
of  the  way  payments  are  effected  between  different  communi- 
ties and  between  different  countries. 

Payments  between  different  communities  of  the  same  coun- 
try may  be  effected  by  the  shipment  of  currency  or  by  the 
use  of  credit.  In  the  United  States  some  form  of  credit  is 
usually  employed,  shipments  of  currency  being  made  only  when 
the  people  of  a  community  as  a  result  of  their  business  transac- 
tions are  called  upon  to  make  payments  to  outsiders  in  excess 
of  the  payments  due  to  them.  Every  bank  in  the  United  States 
has  funds  on  deposit  in  one  or  more  banks  in  other  communi- 
ties, and  thus  is  able  to  sell  to  its  customers  drafts  calling 

77 


78  MONEY  AND   CURRENCY 

for  the  payment  of  money  in  other  cities.  Every  bank  in  the 
United  States  can  sell  a  draft  on  New  York  or  even  on  London. 
All  country  banks  do  not  maintain  deposit  accounts  in  New 
York  City,  but  have  deposit  accounts  with  banks  in  near-by 
large  cities,  and  these  have  balances  in  New  York  upon  which 
their  country  correspondents l  are  permitted  to  draw. 

For  example,  a  bank  in  Barre,  Massachusetts,  need  maintain 
no  deposit  account  in  New  York  in  order  to  sell  a  draft  on  New 
York,  a  credit  balance  in  some  Boston  bank  being  all  that  is 
necessary.  When  one  of  its  customers  desires  a  draft  on  New 
York  the  Barre  bank  may  issue  it  to  him  upon  a  blank  furnished 
by  its  Boston  correspondent.  The  Barre  bank  immediately 
notifies  the  Boston  bank  of  the  transaction.  The  latter  debits 
the  Barre  bank  with  the  face  of  the  draft,  and  advises  its  New 
York  correspondent  that  such  a  draft  has  been  drawn  at  Barre ; 
and  the  New  York  bank,  when  it  honors  or  pays  the  draft, 
debits  its  face  to  the  Boston  bank.  In  this  simple  way  the  banks 
of  the  country  are  all  linked  together.  Small  banks  in  the  neigh- 
borhood of  New  Orleans,  for  example,  sell  exchange  upon  New 
York  through  their  relations  with  the  New  Orleans  banks.  In 
the  same  way  small  banks  in  the  neighborhood  of  St.  Paul 
have  power  to  sell  exchange  upon  New  York  or  upon  Chicago 
through  their  relations  with  the  banks  of  St.  Paul.  Thus  the 
country  is  made  up  of  small  financial  circles  and  centers,  all 
included  within  a  great  circle  of  which  New  York  is  the  grand 
center. 

56.  The  medium  most  employed  for  the  payment  of  debts 
between  different  communities  is  New  York  exchange.  By 
this  is  meant  a  draft,  check,  or  other  credit  instrument  payable 
in  New  York  City.  The  acceptability  of  New  York  exchange 
throughout  the  country  is  due  primarily  to  the  fact  that  New 

1 "  Correspondent "  is  the  technical  term  employed  by  banks  to  designate  those 
banks  with  whom  they  maintain  deposit  accounts  or  for  whom  they  carry  deposits. 
Thus  the  First  National  of  St.  Louis  and  the  Sixth  National  of  New  York  may 
be  correspondents,  the  St.  Louis  bank  maintaining  a  deposit  account  in  the  New 
York  bank.  The  New  York  bank  has  no  need  for  a  deposit  balance  in  St.  Louis, 
but  makes  use  of  the  services  of  its  St.  Louis  correspondent  for  the  collection  of 
checks  upon  banks  in  St.  Louis  or  its  neighborhood. 


DOMESTIC   AND   FOREIGN   EXCHANGE 


79 


York  is  the  commercial  center  of  the  country.  Tradesmen 
everywhere  have  dealings  with  New  York  City.  There  is  not  a 
store  in  the  country  which  does  not  receive  either  directly  or 
indirectly  certain  of  its  supplies  from  that  city.  The  greater 
portion  of  the  surplus  products  of  the  country  each  year  passes 
through  the  port  of  New  York  on  its  way  to  Europe.  The  man- 
ufacturers of  New  York  are  the  largest  customers  of  the  pro- 
ducers of  raw  material. 

Thus  it  happens  that  every  part  of  the  country  contains  men 
who  are  selling  goods  to  New  York,  and  also  men  who  are  buy- 
ing goods  from  there.  If  all  payments  were  made  with  money, 
the  one  class  would  be  receiving  sums  of  money  from  New 
York,  while  the  other  class  would  be  shipping  sums  of  money 
to  New  York.  By  the  use  of  credit  the  shipment  of  money  is 
almost  entirely  dispensed  with.  When  a  southern  cotton  factor, 
for  example,  ships  cotton  to  New  York  he  may  receive  pay- 
ment in  a  check  on  a  New  York  bank.  This  he  deposits  in 
his  local  bank,  receiving  credit  therefor  as  if  he  had  deposited 
money.  On  the  other  hand,  when  a  southern  merchant  receives 
goods  from  New  York  he  buys  from  his  local  bank  a  draft  on 
that  city  and  with  it  satisfies  the  claim  of  his  New  York 
creditor.  In  neither  case  is  the  shipment  of  money  or  currency 
necessary. 

How  the  local  banks  get  their  power  to  sell  drafts  on  New 
York  can  best  be  shown  by  a  concrete  illustration.  We  will 
suppose  that  a  bank  in  Aurora,  Illinois,  has  on  deposit  $10,000 
with  the  First  National  of  Chicago.  Let  us  suppose  that  an 
Aurora  manufacturer  has  sold  stoves  to  an  eastern  dealer  and 
has  received  in  payment  a  check  for  $1000  on  the  Corn 
Exchange  bank  of  New  York.  He  will  deposit  this  check  in 
his  Aurora  bank,  which  will  send  it  to  its  Chicago  correspond- 
ent, and  thereby  increase  its  credit  balance  to  $11,000.  The 
Chicago  bank  will  send  the  check  to  its  correspondent  in  New 
York,  and  so  increase  its  credit  balance  in  New  York  by  $1000. 
By  an  arrangement  with  the  First  National  of  Chicago  the 
Aurora  bank  is  able  to  sell  drafts  on  the  Corn  Exchange  of 
New  York,  using  for  the  purpose  blank  drafts  furnished  by  the 


80  MONEY  AND   CURRENCY 

First  National.  It  is  quite  possible  that  on  the  same  day  a 
merchant  in  Aurora,  who  has  bought  goods  from  New  York, 
will  call  upon  the  Aurora  bank  for  a  draft  on  New  York.  He 
may  not  want  a  draft  for  exactly  $1000,  but  that  does  not  matter. 
The  Aurora  bank  is  able  to  sell  to  him  a  draft  for.  any  amount 
up  to  $  1 1,000,  for  its  credit  balance  in  the  Chicago  bank  gives 
it  a  right  to  "  draw  "  upon  New  York  for  that  amount.  Thus, 
on  account  of  New  York's  trade  relations  with  all  parts  of  the 
country,  banks  everywhere  are  usually  able  to  sell  drafts  on 
that  city  without  being  compelled  to  ship  currency. 

New  York  exchange  is  used  not  only  for  payments  between 
New  York  and  other  parts  of  the  country  but  also  for  pay- 
ments between  points  in  the  United  States  outside  of  New 
York.  A  man  living  in  Buffalo  who  owes  $1000  to  a  man  in 
New  Orleans  can  best  pay  the  debt  by  remitting  a  draft  on 
New  York  City.  This  method  is  the  one  usually  employed,  for 
Buffalo  banks  maintain  no  balances  in  New  Orleans,  and  so  can- 
not sell  drafts  on  that  city.  They  can,  however,  sell  a  draft  on 
New  York,  and  that  will  usually  be  accepted  by  New  Orleans 
banks  at  par.  When  the  reader  takes  into  account  that  New 
York  checks  and  drafts  are  every  day  being  used  in  this  way 
for  the  cancellation  of  debts  in  all  parts  of  the  United  States, 
he  will  understand  why  New  York  exchange  is  deservedly 
called  "the  business  man's  money." 

CAUSES  OF  CURRENCY  SHIPMENTS 

57.  But  does  not  a  bank  sometimes  receive  a  call  for  more 
New  York  exchange  than  it  can  conveniently  sell?  This  does 
frequently  happen,  and  as  a  result  bankers  are  sometimes  forced 
to  charge  a  small  premium  for  New  York  exchange.  The  price 
which  they  can  charge  is  definitely  fixed  by  the  cost  of  ship- 
ping currency.  This  cost  depends  upon  three  items:  first,  the 
express  charge  ;  second,  insurance  ;  third,  the  loss  of  interest. 
As  a  rule,  the  first  two  charges  are  linked  together  in  a  charge 
made  by  the  express  company,  on  account  of  its  guaranty  to 
deliver  the  currency  to  the  consignee.  The  third  item  of  cost 


DOMESTIC  AND   FOREIGN   EXCHANGE  8 1 

varies  with  the  rate  of  interest.  The  moment  a  bank  gives 
money  to  an  express  company  for  shipment  to  New  York  City, 
the  bank's  power  to  use  it  as  a  reserve,  or  basis  for  loans,  has 
gone.  That  money  cannot  again  become  the  basis  for  banking 
transactions  until  it  has  reached  New  York.  The  amount  of 
this  item  is  high  or  low  according  to  the  rate  of  interest  at  the 
point  from  which  the  shipment  is  made.  These  three  items 
amount  to  about  50  cents  per  $1000  on  a  shipment  of  currency 
between  New  York  City  and  Chicago.  Hence  Chicago  bankers 
are  not  able  to  charge  more  than  50  cents  premium  on  a  New 
York  draft  for  $1000.  A  man  who  wishes  to  send  $1000  to 
New  York  will  not  pay  a  bank  over  $1000.50  for  a  draft,  for  at 
that  price  he  can  ship  the  currency  by  express. 

The  shipment  of  currency  from  one  point  to  another  and 
the  fixing  of  the  rate  of  exchange  are  matters  attended  to  by 
the  banks  themselves.  No  private  business  man  —  excepting 
perhaps  a  few  whose  transactions  foot  up  large  totals  —  ever 
thinks  of  shipping  currency  from  one  point  to  another.  If 
the  people  of  a  western  city  have  been  buying  from  the  East 
more  largely  than  they  have  sold  to  it,  so  that  their  calls  upon 
the  local  banks  for  New  York  exchange  exceed  the  incoming 
supply,  the  banks  themselves  are  forced  to  ship  currency  to 
New  York  in  order  to  cover  their  sales  of  exchange.  In  the 
large  cities  the  banks  make  a  business  of  buying  and  selling 
exchange  from  one  another.  When  the  First  National  of 
Chicago,  for  example,  finds  that  its  New  York  balance  is  run- 
ning low  on  account  of  the  demand  by  its  customers  for  New 
York  drafts,  it  endeavors  to  buy  exchange  from  other  banks 
in  Chicago,  and  will  pay  them  a  premium  for  it.  In  no  case, 
however,  will  it  pay  more  than  50  cents  per  $1000.  The 
sellers  will  be  banks  which  find  that  they  have  on  hand  more 
exchange  on  New  York  than  they  have  need  for,  and  they  will 
ask  for  this  exchange  as  high  a  premium  under  50  cents  per 
$1000  as  they  can  obtain.  The  height  of  the  premium  is  fixed 
by  competition  between  buying  and  selling  banks.  Sometimes 
the  supply  of  New  York  exchange  will  be  so  great  that  it  will 
be  sold  by  one  bank  to  another  at  a  discount.  If  a  bank  having 


82  MONEY  AND   CURRENCY 

a  large  credit  in  New  York  City  orders  currency  shipped  to  it, 
the  expense  on  each  thousand  dollars  will  be  50  cents.  The 
bank  can  better  afford  to  sell  drafts  on  New  York  to  its  neigh- 
bors at  a  discount  of  40  cents  per  $1000  than  order  the  ship- 
ment made.1 

58.  In  the  long  run  the  supply  of  New  York  exchange  in 
any  community  is  about  equal  to  the  demand  for  it.  This  is 
another  way  of  saying  that  each  community  in  the  long  run 
sells  to  other  communities  as  much  as  it  buys  from  them.  In 
certain  seasons  of  the  year,  however,  agricultural  districts  buy 
much  more  from  the  East  than  they  sell  to  it.  This  is  always 
the  case  in  the  winter  and  spring.  No  crops  are  then  being 
harvested,  yet  merchants  all  over  the  country  are  laying  in  their 
stock  of  spring  and  summer  goods.  As  a  result  there  is  so 
strong  a  demand  throughout  the  country  for  drafts  on  New 
York  that  country  banks  are  generally  obliged  to  make  some 
shipment  of  currency  to  New  York  in  order  to  cover  the  drafts 
they  sell.  The  opposite  condition  prevails  in  the  fall  when  the 
crops  are  marketed  and  are  going  forward  for  export.  Then 
the  farmers  of  the  West  and  planters  of  the  South  are  receiving 
in  payment  for  their  goods  eastern  checks,  which  they  deposit  in 
local  banks.  Country  banks  now  find  their  balances  piling  up  in 
New  York  and  are  unable  to  sell  New  York  exchange  as  fast  as 
they  would  like.  As  a  result  New  York  City  banks  are  usually 
ordered  in  the  fall  to  make  shipments  of  cash  to  the  West.  In 

1  The  cost  of  a  currency  shipment  to  or  from  New  York  always  falls  upon  the 
country  bank,  for  it  is  always  upon  their  order  and  for  their  convenience  that  ship- 
ments are  made.  Following  are  the  express  rates  per  $1000  charged  in  1905  on  cur- 
rency shipments  between  New  York  and  four  leading  cities:  Chicago,  50  cents; 
St.  Louis,  60  cents;  New  Orleans,  75  cents;  San  Francisco,  $1.50.  Banks  some- 
times ship  currency  by  registered  mail.  This  method  is  a  little  cheaper  than  ship- 
ment by  express,  but  is  less  expeditious,  it  being  necessary  to  negotiate  with  an 
insurance  company  after  the  package  has  been  registered.  The  Treasury  Depart- 
ment frequently  saves  banks  from  the  necessity  of  currency  shipments;  thus  a  bank 
depositing  $1,000,000  in  the  subtreasury  at  New  York  may  receive  an  order  for 
that  amount  payable  at  the  subtreasury  in  San  Francisco.  Many  of  the  large 
houses  in  Chicago  carry  accounts  in  New  York  banks,  and  some  of  them  compete 
with  Chicago  banks  in  the  purchase  and  sale  of  New  York  exchange.  In  Chicago 
and  some  of  the  other  inland  cities  there  are  so-called  exchange  brokers  whose 
sole  business  is  the  buying  and  selling  of  New  York  exchange  on  commission. 


DOMESTIC   AND  FOREIGN   EXCHANGE  83 

the  winter  and  spring,  when  the  West  is  a  heavy  buyer  from 
the  East,  New  York  exchange  is  usually  quoted  at  a  premium 
in  western  cities.  In  the  autumn  it  is  usually  at  a  discount,  all 
banks  having  an  excessive  supply. 

There  is  another  reason  for  this  seasonal  movement  of  cur- 
rency between  New  York  and  the  country  districts.  In  the 
autumn,  when  the  crops  are  harvested,  there  is  a  great  increase 
throughout  the  West  and  the  South  in  the  need  for  "  hand-to- 
hand  money."  This  must  be  furnished  by  the  country  banks, 
and  they  are  forced  to  draw  on  their  New  York  balances,  first 
by  sales  of  New  York  exchange  and  finally  by  ordering  the 
cash  shipped  to  them.  In  the  winter  and  spring  cash  flows 
back  into  the  country  banks,  until  they  have  more  than  they 
can  profitably  use.  Then  they  build  up  their  New  York  bal- 
ances either  by  buying  and  remitting  exchange  or  by  shipping 
currency. 

59.  What  is  to  prevent  a  community  from  sometimes  buying 
much  more  from  New  York  than  it  sells  to  that  city  ?  Indeed, 
is  not  any  community  always  in  danger  of  purchasing  so  much 
from  other  parts  of  the  country  that  its  bankers  may  be  obliged 
to  send  out  all  their  supply  of  currency  in  order  to  make  the 
payments?  This  brings  up  the  question  of  the  balance  of  trade 
between  communities.  The  balance  of  trade  is  usually  dis- 
cussed by  economists  only  in  relation  to  trade  between  different 
countries,  yet  the  principles  governing  such  trade  differ  in  no 
respect  from  those  governing  trade  between  communities  within 
the  same  country. 

There  is  never  any  danger  that  a  community  will  be  stripped 
of  its  money  or  cash  as  a  result  of  its  purchases  of  goods  from 
other  communities.  No  matter  how  freely  Chicago  and  the 
country  tributary  to  it  may  purchase  goods  from  the  East,  those 
purchases  can  never  make  any  serious  drain  upon  the  cash 
supply  of  Chicago.  No  matter  how  extravagant  the  people  of 
the  West  may  be,  their  purchases  of  eastern  goods  can  never  be 
greatly  in  excess  of  their  sales  to  eastern  consumers.  Should 
the  people  of  Chicago  for  extraordinary  reasons  at  any  time 
increase  their  purchases  from  New  York  and  other  eastern 


84  MONEY  AND   CURRENCY 

cities,  the  first  effect  in  Chicago  would  be  an  increase  in  the 
demand  for  New  York  exchange  and  in  bank  shipments  of 
currency  from  Chicago  to  New  York.  The  loss  of  currency  in 
Chicago,  since  it  would  reduce  the  lending  power  of  Chicago 
banks,  would  tend  to  cause  a  rise  in  the  rate  of  interest  and  a 
rise  in  the  value  of  money.  The  prices  of  commodities  named 
would  begin  to  decline ;  not  of  all  commodities,  but  of  those 
which  are  subjects  of  speculation,  such  as  stocks,  wheat,  corn, 
and  pork.  Most  of  the  speculators  in  these  articles  are  bor- 
rowers, and  the  interest  they  pay  is  an  important  item  in  the 
expenses  of  their  business,  so  that  when  the  interest  rate  rises 
they  are  obliged  to  contract  their  operations.  Chicago  would 
thus  become  a  good  place  to  lend  in  and  also  a  good  place  in 
which  to  buy  stocks  and  bonds,  wheat,  and  other  speculative 
commodities.  In  other  words,  the  value  of  money  would  rise  in 
Chicago,  and  people  in  other  parts  of  the  country  would  in- 
crease their  purchases  in  Chicago  markets,  remitting  New  York 
exchange  in  payment.  The  reader  must  not  suppose  that  these 
changes  in  price  or  in  the  rate  of  interest  need  be  so  great  as 
to  attract  general  attention.  Nevertheless  it  cannot  be  doubted 
that  such  changes  do  take  place,  and  that  as  a  result  the  sales 
of  Chicago  to  other  parts  of  the  country  are  so  adjusted  that 
in  the  long  run  they  furnish  a  supply  of  New  York  exchange 
equal  to  the  demand. 

Thus  it  happens  throughout  the  country  that  in  the  course 
of  a  year  the  debts  of  every  community  are  always  practically 
balanced  by  its  credits  on  account  of  sales,  so  that  large  ship- 
ments of  currency  are  never  necessary.  Indeed,  if  our  mone- 
tary and  banking  systems  were  perfect,  no  shipment  of  currency 
from  one  part  of  the  country  to  another  would  ever  occur  as 
a  necessary  result  of  trade  transactions.  Money  or  currency 
would  only  be  shipped  to  a  community  as  a  result  of  an  increas- 
ing need  for  it  as  a  medium  of  exchange  or  as  a  basis  for  the 
expansion  of  bank  credits.  In  Canada,  for  example,  on  account 
of  the  elasticity  of  its  bank-note  circulation,  seasonal  variations 
in  the  demand  for  currency  are  easily  provided  for  by  the  local 
banks  and  their  branches. 


DOMESTIC  AND   FOREIGN   EXCHANGE  85 

INTERNATIONAL  PAYMENTS 

60.  The  principles  governing  international  payments  and  the 
flow  of  gold  between  nations  are  the  same  as  those  governing 
payments  between  communities  of  the  same  country.  To  a 
man  who  has  given  no  thought  to  the  subject,  what  is  known 
as  the  "  balance  of  trade  "  appears  to  be  the  cause  of  gold  ship- 
ments. He  may  well  wonder  how  this  balance  of  trade  never 
happens  to  be  large  enough  to  exhaust  a  country's  gold  supply. 
Horace  Greeley  frequently  warned  Americans  against  the  pur- 
chase of  European  articles  lest  they  be  impoverished  and  all 
their  money  sent  abroad.  A  little  examination  of  the  subject 
will  show  that  a  country's  gold  supply  can  never  be  in  danger 
of  serious  depletion,  no  matter  how  extravagantly  fond  its 
people  may  be  of  articles  bearing  a  foreign  trade-mark. 

As  was  said  in  Chapter  II,  when  a  country  is  using  gold  as 
money  and  admitting  it  freely  to  the  mints  for  coinage,  the 
value  of  gold  determines  the  value  and  purchasing  power  of 
money.  Gold  is  really  the  money  of  the  country ;  the  coins 
are  merely  convenient  pieces  of  the  metal  so  stamped  that  no 
one  has  any  doubt  as  to  the  quantity  of  gold  they  contain.  A 
man  who  owes  $1000  in  the  United  States  owes  1000  times 
23.22  grains  of  pure  gold.  In  England  the  sovereign  contains 
about  113  grains  of  pure  gold,  or  4.8665  times  as  much  gold 
as  the  American  dollar;  so  a  sovereign  is  equal  to  $4.8665. 
This  equality  in  the  relation  between  the  weights  of  pure  metal 
in  the  coins  of  different  countries  is  known  as  the  "mint  par" 
or  "par  of  exchange."  The  mint  par  between  the  English 
sovereign  and  the  American  dollar  is  expressed  by  the  equation 
£i  =  $4.8665.  If  any  person  should  take  1000  full-weight  Eng- 
lish sovereigns  to  the  United  States  Mint,  he  could  have  them 
coined  into  $4866.  He  would  still  have  the  same  amount  of 
gold,  only  its  form  would  be  changed.1 

1  The  sovereign  contains  123.27447  grains  of  English  standard  gold,  which  is 
eleven  twelfths  fine.  It  contains,  therefore,  113.00157  grains  of  pure  gold. 

The  franc,  which  is  the  French  monetary  unit,  consists  of  4.48025  grains  of 
pure  gold  (4.97806  grains  of  standard  gold,  nine  tenths  fine).  It  is  the  equivalent 
of  19.3  cents  United  States  money.  The  mint  par  between  sovereigns  and  francs 


86  MONEY  AND  CURRENCY 

61.  With  respect  to  the  trade  of  the  world  London  holds  a 
position  similar  to  that  held  by  New  York  with  respect  to  the 
trade  of  the  United  States.     England's  insular  position  and 
the  character  of  her  resources  early  led  her  people  to  seek  the 
profits  of  manufacture  and  to  explore  the  earth  in  search  of  raw 
material  for  her  factories  and    of    markets  for  her  products. 
Every  country  on  the  globe  trades  with  London,  just  as  all 
parts  of  the  United  States  trade  with  New  York.    In  the  same 
way  that  a  draft  upon  New  York  has  become  the  business 
man's  medium   of  exchange  in  the  United  States,  so  has  a 
draft  upon  London  become  the  medium  of  exchange  between 
different  countries.    Banks  all  over  the  world  find  it  advan- 
tageous to  have  credit  balances   in  London  banks,  for  their 
customers  are  constantly  calling  for  London  exchange.    These 
balances  are  not  built  up  by  the  shipment  of  gold,  but  by  the 
remittance  of  checks  and  drafts  which  banks  receive  from  their 
customers  who  have  shipped  goods  to  London. 

62.  Drafts  on  London  frequently  originate   in   commercial 
transactions  in  which  London  is  not  concerned.    A  New  York 
importer  of  coffee  from  South  America  is  quite  as  likely  to 
send  in  payment  a  draft  on  London  as  to  send  a  check  on  New 
York.    Sometimes,  indeed,  as  will  appear  later,  it  will  be  to  his 
advantage  to  send  a  draft  on  London.    So  an  exporter  of  tea  in 


is  £i  =  25.22  francs.  The  franc  is  divided  into  100  centimes.  The  French  law 
provides  that  one  kilogram  of  standard  gold  shall  be  coined  into  3100  francs,  of 
which  the  government  retains  7f  as  a  seigniorage  tax. 

The  monetary  unit  of  Germany  is  the  mark  of  6.14757  grains  of  standard  gold 
nine  tenths  fine,  or  5.53113  grains  of  pure  gold.  One  kilogram  of  fine  gold  is 
coined  into  2790  marks  ;  seigniorage  14  marks.  A  sovereign  equals  20.43  marks. 
The  mark  is  divided  into  100  pfennige.  The  smallest  gold  coin  is  the  five-mark 
piece. 

In  New  York  exchange  quotations  are  usually  given  on  the  following  basis. 

£i  -  #4-8665 
4  marks  =  #.952 

$i  =  5.18  francs 

Throughout  this  chapter,  which  is  concerned  with  principles  rather  than  with 
details,  I  assume  that  all  international  payments  are  made  with  sterling  exchange. 
I  do  this  in  order  that  the  reader  may  not  be  confused  with  unnecessary  complica- 
tions. Much  use  is  made  of  exchange  on  Paris  and  Berlin,  but  the  principles  gov- 
erning continental  exchange  are  not  different  from  those  governing  sterling. 


DOMESTIC   AND   FOREIGN   EXCHANGE  87 

China,  even  though  his  tea  has  been  shipped  to  Paris,  may  be 
paid  by  a  draft  on  London  instead  of  by  a  draft  on  Paris,  and 
may  prefer  payment  in  such  form.  In  fact,  a  draft  on  London 
may  be  used  for  the  payment  of  a  debt  in  any  part  of  the 
world,  and  will  be  as  welcome  as  is  a  New  York  check  in  any 
part  of  the  United  States.  For  this  reason  London  exchange, 
or  "  sterling  exchange"  as  it  is  commonly  called,  comes  near- 
est to  being  what  might  be  called  the  world's  credit  money. 
Among  business  men  everywhere  it  is  the  most  acceptable  and 
common  medium  of  exchange  in  the  settlement  of  large  trans- 
actions. 

The  custom  of  the  business  world  has  given  rise  to  what 
is  called  a  "  sterling  bill  of  exchange."  A  London  importer 
seldom  sends  a  check  in  payment  for  the  goods  he  receives. 
Instead  he  allows  himself  to  be  "drawn  on"  by  the  exporter 
in  the  foreign  country.  The  exporter  writes  a  draft  upon  the 
London  importer  for  the  amount  in  question,  attaches  to  this 
draft  the  bill  of  lading  and  other  evidences  of  the  shipment, 
and  sells  it  to  his  local  bank  for  the  money  of  his  country.  The 
local  bank  then  forwards  the  draft  to  its  correspondent  bank 
in  London.  If  it  is  a  sight  draft,  the  London  bank  at  once  pre- 
sents it  to  the  drawee  for  payment ;  if  a  time  draft,  the  London 
bank  presents  it  to  the  drawee  "for  acceptance,"  whereupon 
the  drawee  writes  "accepted"  and  his  signature  upon  its  face. 
After  the  draft  has  been  accepted  it  becomes  legally  a  promis- 
sory note  or  bill  payable,  and  may  be  discounted  and  passed 
through  several  hands  before  it  falls  due. 

Bills  payable  on  demand  are  known  as  "sight  exchange"; 
bills  payable  within  ten  days  are  called  "  short  bills  "  ;  those 
running  for  longer  periods,  "  long  bills."  Drafts  upon  London 
originating  in  a  business  transaction  in  the  manner  above  de- 
scribed are  known  as  "  commercial  bills  "  and  seldom  run  over 
ninety  days.  When  a  banker  in  a  foreign  country  makes  a 
draft  upon  a  London  bank  such  a  bill  is  known  as  a  banker's 
draft,  or  a  banker's  bill.  "Cable  exchange"  is  a  name  given 
in  New  York  to  drafts  upon  London  sold  by  banks  and  paid 
the  same  day  in  London  in  compliance  with  a  cablegram.  Such 


88  MONEY  AND   CURRENCY 

bills,  of  course,  cost  more  than  the  ordinary  sight  bill  by  at 
least  the  cost  of  the  cablegram.  A  long  bill  sells  for  less  than 
a  sight  bill  on  account  of  the  deduction  of  interest.  A  sixty- 
day  sterling  bill  for  .£1000  is  an  order  for  the  payment  of 
;£iooo  in  London  sixty  days  hence.  In  a  community  where 
the  prevailing  rate  of  interest  is  6  per  cent  such  a  bill  would 
naturally  sell  for  I  per  cent  less  than  .£1000.  The  custom  of 
drawing  ten-day  bills  owes  its  origin  to  the  length  of  the  voyage 
across  the  Atlantic,  the  intention  being  that  such  a  bill  shall 
reach  London  at  maturity. 

THE  PAR  OF  EXCHANGE 

63.  If  the  trade  between  New  York  and  other  parts  of  the 
world  were  all  settled  with  sterling  bills  or  bankers'  drafts  on 
London,  and  if  our  imports  were  always  exactly  equal  to  our 
exports,  sterling  bills  of  exchange  would  alw'ays  be  at  par  in 
New  York  City.  By  this  is  meant  that  bankers  would  at  all 
times  be  able  to  sell  an  order  for  a  sovereign  in  London  for 
$4.86f.  They  might  charge  a  fraction  more  in  order  to  give 
them  a  profit,  but  they  could  afford  to  sell  sight  sterling  at  par, 
for  the  supply  of  sterling  bills  deposited  with  them  by  New 
York  exporters  would  just  equal  the  demand  for  sterling  on 
the  part  of  the  importer.  The  New  York  bankers,  by  sending 
the  sterling  bills  to  London,  would  create  credit  balances  to 
cover  all  the  drafts  sold  by  them,  and  so  would  not  be  obliged 
to  send  any  gold. 

Such  a  condition,  however,  seldom  exists.  In  some  seasons 
of  the  year  the  United  States  (and  what  is  said  of  the  United 
States  applies  with  equal  truth  to  any  other  country)  is  im- 
porting largely  in  excess  of  its  exports;  in  other  seasons  its 
exports  are  in  excess.  When  the  United  States  is  importing 
more  than  it  exports,  the  demand  in  this  country  for  drafts  on 
London  runs  ahead  of  the  supply  in  the  hands  of  bankers  and 
they  ask  more  than  par  for  them.  A  shipment  of  gold  to  Lon- 
don costs  about  two  cents  per  sovereign.  Hence  any  man  who 
has  a  debt  due  in  London  can  afford  to  pay  a  banker  a  premium 


DOMESTIC  AND   FOREIGN   EXCHANGE  89 

of  two  cents  for  a  sight  draft ;  in  other  words,  he  can  afford  to 
pay  a  banker  $4.88  for  a  draft  rather  than  ship  gold.  The 
price  of  sight  sterling  may  rise  even  to  $4.886  before  debtors 
in  the  United  States  find  it  advantageous  to  ship  the  gold  itself 
to  London. 

On  the  other  hand,  when  bankers  buy  more  sterling  than  is 
wanted  by  importers,  it  is  evident  that  their  credit  balances  in 
London  are  increasing.  Bankers  usually  desire  to  have  their 
funds  at  home  and  not  in  foreign  cities,  but  as  it  costs  two 
cents  per  sovereign  to  import  gold,  they  can  better  afford  to 
sell  drafts  on  London  at  less  than  par.  Under  such  circum- 
stances, therefore,  bankers,  as  a  result  of  competition  among 
themselves,  sometimes  lower  the  price  of  sight  sterling  to 
$4.846. 

Thus  the  price  of  a  draft  on  London  is  constantly  fluctuating 
as  the  trade  between  this  country  and  other  parts  of  the  world 
varies,  or  as  the  relation  between  the  demand  for  and  supply 
of  sterling  exchange  is  altered.  When  the  price  of  sterling 
exchange  is  rising  we  know  either  that  our  purchases  abroad 
are  increasing  or  that  our  sales  to  foreigners  are  decreasing, 
and  that  thus  the  relation  between  the  demand  for  and  supply 
of  sterling  is  altered.  When  the  price  of  sterling  is  declining 
we  know  either  that  our  sales  to  foreigners  are  increasing  or 
that  our  purchases  from  foreign  countries  are  decreasing,  and 
that  thus  the  demand  for  sterling  in  proportion  to  the  supply 
is  declining. 

64.  The  expense  in  the  case  of  the  shipment  of  gold  from 
one  country  to  another,  as  in  the  case  of  the  shipment  of 
currency  from  one  city  to  another  in  the  United  States,  is  made 
up  of  three  items  :  the  freight  charge,  the  insurance,  and  the 
loss  of  interest.  The  first  two  items  are  free  from  fluctuation, 
although  they  have  declined  somewhat  during  the  last  twenty 
years.  The  loss  on  account  of  interest  depends,  of  course,  upon 
the  current  rate.  When  the  rate  of  interest  is  2  per  cent  in  New 
York  City  the  cost  to  a  banker  on  a  shipment  of  gold  to  London 
is  obviously  less  than  when  the  rate  is  5  per  cent.  In  the  same 
way,  when  the  rate  of  interest  is  high  in  London  the  cost  of  a 


90  MONEY  AND   CURRENCY 

gold  shipment  from  London  is  greater  than  when  it  is  low.  The 
cost,  however,  does  not  necessarily  fall  upon  the  banker  who 
makes  the  shipment.  It  is  borne  by  the  banker  on  whose  order 
it  is  made.1 

It  is  evident  that  the  price  of  sight  sterling  cannot  fall  below 
a  point  in  New  York  City  at  which  it  is  profitable  to  export 
gold.  If  the  supply  of  sterling  bills  is  so  large  in  New  York 
that  bankers  are  forced  to  offer  them  for  less  than  $4.846,  it 
soon  becomes  profitable  for  some  house  to  buy  sterling  at  this 
rate  and  at  the  same  time  order  gold  shipped  from  London.  If 
a  banking  house  can  buy  sterling  at  $4.843  and  import  gold 
from  London  at  an  expense  of  only  two  cents  on  the  sovereign, 
it  makes  a  small  percentage  of  profit  by  the  transaction  ;  if  the 
importation  amounts  to  a  million  dollars,  the  profit  would  be 

1  During  the  last  quarter  of  the  nineteenth  century  the  cost  of  shipping  gold 
from  New  York  to  London  fell  from  three  to  two  cents  per  pound  sterling.  The 
charges  for  freight  and  insurance  both  declined,  while  the  increased  speed  of 
transatlantic  liners  reduced  the  loss  on  account  of  interest. 

The  following  figures,  showing  the  cost  of  shipping  $1,000,000  in  gold  from 
New  York  to  London,  were  furnished  by  the  representative  of  one  of  the  largest 
New  York  banking  houses. 

Invested  in  fine  bars,  23,200,000  gr.  (48,375  oz.)      .         .         .  $1,000,000.00 

Assay  office  premium  on  bars,  4^  per  $100               .         .         .  400.00 

Freight,  &  per  cent           .........  1,562.50 

Insurance,  is  per  cent       ........  625.00 

Packing  and  cartage         ........  70.00 

Total  outlay         .......        $1,002,657.50 

The  Bank  of  England's  "price"  of  gold  varies  from  775.  Q|d.  to  775.  io|d.  per 
ounce,  English  standard,  91  6|  fine.  The  mint  coins  an  ounce  of  gold,  English 
standard,  into  773.  io^d.;  but  the  Bank  of  England,  with  which  it  is  the  custom  of 
bullioji  owners  to  deal,  usually  pays  a  fraction  less  than  this  sum,  thus  saving  itself 
from  loss  of  interest  while  the  bullion  is  being  coined.  It  is  assumed  below  that 
the  bank  pays  773.  lod.  per  ounce. 

48,375  oz.  fine  =  52,772.7  oz.,  gi6§  fine. 

52,772.7  oz.  @  773.  lod  .........        £205,374 

Deduct  sundry  expenses         ........  4 


Net  receipts  in  London     .        ..... 

Cost  of  sovereign  (1,002,657.50  -4-  205,370)     .....  $4.8822 

Mint  par  in  United  States     ........  4.8665 

Cost  of  shipment  per  sovereign         ....  $.0157 

The  reader  will  notice  that  no  loss  on  account  of  interest  is  included  in  the 
foregoing.    The  New  York  banker  who  furnished  the  figures  held  that  no  such 


DOMESTIC  AND   FOREIGN   EXCHANGE  91 

about  $700.  On  the  other  hand,  if  the  demand  for  sterling  is 
largely  in  excess  of  the-supply,  bankers  are  able  to  sell  drafts 
on  London  for  more  than  par ;  but  should  the  price  rise 
above  $4.886,  it  would  soon  become  profitable  for  some  banker 
to  sell  sterling  at  the  high  rate  and  to  export  gold  to  London 
to  cover  his  drafts.  If  a  banker,  for  instance,  can  sell  sterling 
for  $4.8865  when  it  costs  him  only  1.8  cents  per  sovereign  to 
export  gold,  he  makes  a  profit  of  two  mills  on  each  sovereign 
(113  grains  pure  gold)  exported. 

That  point  in  the  price  of  sterling  which  makes  the  importa- 
tion of  gold  profitable  is  called  the  "gold  import  point."  The 
price  at  which  the  exportation  of  gold  is  profitable  is  called  the 
"  gold  export  point."  These  two  prices  are  often  referred  to 
as  the  "gold  points."  The  reader  must  bear  in  mind  that  they 
are  not  the  same  at  different  times,  for  they  vary  with  the  rate 
of  interest. 

VISIBLE  AND  INVISIBLE  ITEMS  OF  TRADE 

65.  The  supply  of  and  demand  for  sterling  exchange  in  New 
York  City  is  due  to  the  visible  and  invisible  foreign  trade  of 
this  country.  Our  visible  exports  consist  of  merchandise,  and 

item  was  involved,  for  he  sold  sterling  exchange  as  soon  as  he  made  a  ship- 
ment, and  so  was  never  out  of  money  in  consequence.  If  we  include  interest  for 
ten  days  at  3  per  cent  ($835.54),  we  raise  the  cost  of  the  shipment  to  $.0197  per 
sovereign. 

The  Bank  of  England  usually  pays  per  ounce  for  American  gold  coin  775.  5d., 
such  coin  being  only  900  fine.  As  the  Treasury  Department  charges  a  premium 
for  gold  bars,  it  would  be  cheaper  to  ship  coin  than  bars,  were  not  the  coin 
likely  to  be  underweight  from  abrasion.  Bullion  is  taken  by  weight  and  disposed 
of  by  weight ;  but  coin  is  taken  by  tale  and  disposed  of  in  London  by  weight.  The 
premium  charged  for  gold  bars  is  to  a  certain  extent  offset  by  the  finer  assay  in 
England;  the  assay  in  the  United  States  is  on  the  basis  of  progressions  of  one 
fourth,  while  the  assay  in  England  is  in  decimals.  Coin,  being  packed  in  bags,  is 
liable  to  some  loss  from  abrasion  in  transit.  One  of  the  largest  New  York  shippers 
says  he  figures  on  a  difference  of  $.30  per  $1000  in  favor  of  gold  bars. 

According  to  another  large  bullion  dealer  in  New  York,  the  cost  of  a  shipment 
is  even  less  than  is  shown  above.  He  gives  the  items  as  follows :  premium  on 
bars,  $.40  per  $1000;  freight,  i  of  I  per  cent ;  insurance,  $.50  per  $1000;  cartage, 
$i  per  keg  of  $50,000  ;  packing,  $1.50  per  keg  of  $50,000.  On  the  basis  of  these 
charges,  allowing  for  ten  days'  interest  at  3  per  cent,  the  cost  of  a  shipment  of 
gold  is  $.0174  per  sovereign. 


92  MONEY  AND    CURRENCY 

include  the  products  of  our  farms,  forests,  mines,  and  factories. 
As  every  vessel  clearing  from  an  American  port  must  declare 
its  cargo,  we  have  a  record  of  all  our  visible  exports;  and  as  all 
goods  imported  from  foreigners  are  examined  at  our  custom- 
houses, we  have  likewise  a  record  of  all  our  visible  imports. 
Since  fairly  accurate  records  of  these  exports  and  imports  of 
merchandise  are  published  from  time  to  time,  they  are  quite 
commonly  regarded  by  the  people  as  being  the  sum  total  of 
our  foreign  trade  and  as  being  the  main  sources  of  the  supply 
of  and  demand  for  foreign  exchange.  When  the  exports  of  a 
country  exceed  its  imports  the  excess  is  commonly  known  as 
a  ".favorable  balance  of  trade"  and  people  usually  expect  an 
importation  of  gold  to  result.  When  the  imports  are  larger 
than  the  exports  the  balance  of  trade  is  called  "  unfavorable  " 
because  it  is  supposed  to  lead  naturally  to  an  exportation  of 
gold. 

The  expression  "  balance  of  trade  "  as  used  in  this  connec- 
tion is  not  accurate,  for  it  leaves  out  of  account  that  part  of 
our  foreign  trade  which  is  invisible.  There  is,  furthermore,  no 
justification  whatever  for  the  use  of  the  adjectives  "  favorable  " 
and  "  unfavorable."  The  so-called  balance  of  trade  has  prac- 
tically no  relation  whatever  to  the  prosperity  or  general  welfare 
of  a  country.  The  idea  that  an  excess  of  exports  is  desirable, 
in  that  it  seems  to  point  to  an  importation  of  gold,  had  its 
origin  in  a  misconception  of  the  true  nature  of  national  wealth. 
A  country  needs  a  certain  amount  of  gold  for  use  in  the  arts 
and  as  money,  just  as  it  needs  a  certain  amount  of  wheat  for  use 
as  food,  or  a  certain  amount  of  coal  for  use  as  fuel.  It  should 
import  gold,  just  as  it  imports  coal  or  wheat,  only  when  there 
is  need  for  an  increase  in  the  stock  of  the  metal. 

66.  A  country's  invisible  foreign  trade  is  quite  as  important 
as  its  visible  trade  in  its  effect  upon  the  price  of  sterling  ex- 
change. This  invisible  trade  consists  of  the  import  and  export 
of  debts.  For  convenience  we  may  divide  this  trade  into  three 
classes :  first,  the  trade  in  stock-market  securities ;  second, 
private  investments  of  capital ;  and,  third,  bank  investments. 
All  of  this  invisible  trade  is  related  to  the  investment  or 


DOMESTIC  AND   FOREIGN  EXCHANGE 


93 


employment  of  capital  and  is  based  on  some  form  of  loan  or 
credit.  We  will  consider  each  class  separately. 

The  sale  of  stock-market  securities  by  New  York  to  London 
gives  rise  to  sterling  exchange  in  exactly  the  same  way  as  the 
sale  of  wheat.  When  an  English  investor  buys  the  stock  or 
bond  of  an  American  corporation,  the  New  York  seller  draws 
on  him,  or  on  his  broker,  and  sells  the  draft  to  a  New  York 
banker,  thus  increasing  the  supply  of  sterling  exchange  in  New 
York  and  tending  to  lower  its  price.  The  opposite  happens 
when  an  English  broker  sells  securities  to  a  New  York  pur- 
chaser. Then  the  New  York  buyer  of  the  security  must  go  to 
his  bank  and  purchase  a  draft  on  London  in  order  to  make  pay- 
ment, so  increasing  the  New  York  demand  for  sterling.  Like- 
wise, when  an  American  buys  from  a  Londoner  the  securities 
of  an  English  company,  or  English  consols, — the  popular  name 
of  the  English  national  debt,  —  he  must  enter  the  New  York 
market  as  a  buyer  of  sterling  exchange.  The  demand  for 
sterling  is  also  frequently  increased  by  the  investments  of 
Americans  in  the  securities  of  foreign  countries  other  than 
England,  for  payment  for  such  securities  is  frequently  made 
by  drafts  on  London.  A  purchase  of  Russian  bonds  by  an 
American  is  quite  as  likely  to  be  paid  for  by  a  London  draft 
as  by  a  draft  on  St.  Petersburg.  So  the  demand  for  sterling 
exchange,  and  hence  the  price  of  sterling  exchange,  is  con- 
stantly dependent  upon  the  investments  which  Americans  make 
in  the  securities  of  foreign  countries. 

A  large  part  of  the  supply  of  sterling  comes  from  a  similar 
source,  for  whenever  a  foreigner  in  any  part  of  the  world  buys 
an  American  security  he  is  quite  likely  to  remit  in  payment  a 
draft  upon  London.  Purchases  by  foreigners  are  usually  made 
by  brokers  upon  the  floors  of  their  own  stock  exchanges,  and 
often  do  not  result  in  any  sale  on  the  part  of  New  York  or  in 
any  transaction  on  the  New  York  stock  exchange.  An  English 
investor  desiring  to  buy  the  stock  of  the  Pennsylvania  Railroad 
does  not  send  an  order  to  New  York,  but  gives  his  order  to  a 
London  broker.  The  London  broker,  as  a  rule,  will  endeavor 
to  buy  the  stock  upon  the  London  exchange.  But  if  no  holder 


94  MONEY  AND   CURRENCY 

is  willing  to  sell,  he  will  be  unable  to  buy  unless  he  offers  upon 
the  floor  of  the  London  stock  exchange  a  price  that  makes  it 
profitable  for  some  dealer  to  cable  an  order  to  New  York  for 
the  purchase  of  the  stock  there. 

In  every  large  city  there  are  houses  which  make  a  business 
of  keeping  close  watch  upon  the  stock  markets  of  different  coun- 
tries in  order  that  they  may  make  a  profit  whenever  they  discover 
slight  disparities  between  the  prices  of  securities  in  two  differ- 
ent markets.  These  are  known  as  "  arbitrage  "  houses.  If  the 
price  offered  for  Pennsylvania  Railroad  stock  on  the  London 
exchange  is  a  fraction  above  the  price  at  which  it  is  selling  in 
the  New  York  stock  market,  arbitragers  buy  in  New  York 
and  sell  in  London  on  the  same  day.  Such  a  transaction  is 
often  completed  within  two  minutes.  Of  course  they  cannot 
deliver  the  stock  until  it  has  arrived  from  New  York,  but  if 
immediate  delivery  be  demanded,  they  may  borrow  stock  in 
London  for  the  purpose  and  repay  when  their  stock  arrives 
from  New  York.  These  arbitragers  make  impossible  any  great 
differences  in  price  in  the  stock  markets  of  the  world.  Their 
transactions  are  enormous.  If  for  any  cause  the  London  stock 
market  is  weak  while  the  New  York  market  remains  strong, 
the  operations  of  arbitrage  houses  result  in  a  great  movement 
of  stocks  from  London  to  New  York,  increasing  thereby  the 
demand  for  sterling  exchange  in  the  latter  city.  On  the  other 
hand,  if  the  New  York  market  is  depressed  by  some  circum- 
stance which  does  not  affect  the  English  or  other  foreign 
stock  markets,  a  stream  of  securities  pours  across  the  Atlantic 
into  Europe  and  a  supply  of  sterling  exchange  in  New  York  is 
thus  created. 

This  automatic  movement  of  securities  toward  the  markets 
paying  highest  prices  is  the  most  sensitive  part  of  our  foreign 
trade  and  is  the  one  which  appears  to  have  the  greatest  effect 
upon  foreign  exchange  quotations.  No  public  record  can  be 
kept  of  this  movement  and  no  accurate  estimate  can  be  made 
at  any  time  of  its  volume.  We  only  know  that  the  rates  of 
foreign  exchange  instantly  respond  to  any  changes  in  the  con- 
ditions governing  stock-market  prices. 


.      DOMESTIC  AND   FOREIGN   EXCHANGE  95 

INVESTMENTS  OF  CAPITAL 

67.  The  second  class  of  our  invisible  foreign  trade  includes 
all  those  investments  of  capital  which  are  not  made  through 
the  purchase  of  securities  upon  the  stock  exchange.  When  an 
Englishman  purchases  a  farm  or  a  gold  mine  in  the  United 
States,  or  advances  money  to  his  sons  who  are  managing  a 
cattle  ranch  in  Wyoming,  he  increases  the  supply  of  sterling 
exchange  in  this  country.  He  does  not  send  over  English  gold  ; 
he  either  sends  a  check  on  London  or  permits  his  American 
creditor  to  draw  upon  him.  The  result  is  the  same  in  either 
case,  —  an  increase  of  the  power  of  American  banks  to  sell  drafts 
on  London,  and,  consequently,  a  downward  tendency  in  the 
price  of  sterling  exchange.  It  is  impossible  to  make  any  esti- 
mate of  the  amount  of  these  investments  from  year  to  year. 
No  attempt  has  ever  been  made  to  keep  records  of  such  opera- 
tions, and  it  is  doubtful  if  trustworthy  statistics  could  be  ob- 
tained even  if  every  bank  in  the  country  engaged  in  the  task. 
Such  statistics  could  not  be  secured  by  the  government  with- 
out obnoxious  inquiry  into  the  private  affairs  of  its  citizens. 
Every  American  who  is  educating  his  son  or  daughter  in  Europe, 
or  who  invests  in  tramways  in  a  European  city  or  in  a  saw- 
mill in  Russia,  is  a  buyer  of  foreign  exchange,  and  usually  of 
sterling  exchange. 

The  third  class  of  invisible  trade  consists  of  bankers'  invest- 
ments and  is  usually  the  result  of  fluctuations  in  the  interest 
rate.  If  the  rate  in  London  is  much  lower  than  in  New  York, 
London  bankers,  wishing  to  take  advantage  of  the  higher  rate 
in  New  York,  authorize  their  New  York  correspondents  to  make 
drafts  upon  them,  thus  increasing  the  supply  of  sterling  ex- 
change in  New  York.  When  a  New  York  bank  is  advised  by 
a  London  correspondent  to  make  a  draft  of  ,£10,000,  or  in 
round  numbers  $50,000,  and  to  invest  the  proceeds  in  the  dis- 
count of  good  commercial  paper  in  New  York,  the  New  York 
bank  is  obliged  to  sell  this  draft  in  order  to  get  the  funds  for 
the  purchase  of  commercial  paper  for  its  London  correspondent. 
In  1897,  when  business  was  very  dull  in  the  United  States,  but 


96  MONEY  AND   CURRENCY 

had  begun  to  revive  in  Europe,  the  interest  rate  in  our  large 
cities  was  lower  than  in  Berlin  and  Paris,  and  as  a  result  our 
bankers  allowed  their  European  balances  to  increase  and  really 
became  investors  of  capital  in  Europe.  The  supply  of  sterling 
exchange  on  sale  in  this  country  was  reduced  by  the  amount 
which  American  bankers  invested  in  Europe.  As  a  rule  bankers 
desire  to  employ  their  funds  at  home,  yet  whenever  great 
advances  occur  in  the  rates  of  interest  abroad,  these  bank  oper- 
ations take  place  and  have  an  important  effect  upon  the  rates  of 
exchange,  and  hence  upon  the  importation  and  exportation  of 
gold.  If  the  American  bankers  in  1897  had  not  been  tempted 
by  the  high  rate  of  interest  to  increase  their  balances  in  Europe, 
but  had  endeavored  to  sell  exchange  in  order  to  have  available 
funds  at  home,  importations  of  gold  would  have  resulted. 

68.  There  are  a  few  miscellaneous  items  which  must  be 
classed  with  the  invisible  trade.  The  most  important  of  these 
are  the  expenses  of  travelers  and  the  freight  charges  paid  to 
foreign  shipowners.  It  is  estimated  that  Americans  spend 
between  $75,000,000  and  $100,000,000  a  year  in  foreign 
travel.  Before  an  American  crosses  the  Atlantic  he  buys  of 
his  banker  a  draft  or  letter  of  credit,  which  entitles  him  to  ob- 
tain money  in  London  or  some  other  European  city.  As  a  rule 
Americans  buy  London  exchange ;  hence  the  result  of  Ameri- 
can travel  and  residence  abroad  is  to  increase  the  demand  for 
sterling  exchange  in  New  York  City.  This  demand  is  some- 
what offset  by  the  supply  of  sterling  brought  by  foreign  tourists 
to  this  country.  They  bring  with  them  drafts  or  letters  of 
credit  which  they  sell  to  American  banks. 

The  item  of  freight  on  merchandise  exported  and  imported 
amounts*  to  a  large  sum  and  is  paid  to  foreign  shipowners, 
American  vessels  doing  very  little  of  the  transatlantic  busi- 
ness. If  an  American  imports  or  exports  goods  in  an  English 
vessel,  the  payment  of  the  freight  bill  gives  rise  to  a  demand 
for  sterling  exchange.  The  American,  indeed,  may  pay  the  bill 
by  a  check  to  the  New  York  agent  of  the  English  steamship 
company,  but  the  effect  will  be  the  same,  for  the  agent  in  order 
to  remit  to  London  will  be  obliged  to  buy  sterling. 


DOMESTIC  AND   FOREIGN    EXCHANGE  97 

GOLD  SHIPMENTS  AND  THE  BALANCE  OF  TRADE 

69.  The  so-called  balance  of  trade  has  very  little  relation  to 
the  international  movements  of  gold.  As  has  been  shown,  gold 
is  exported  from  the  United  States  when  the  price  of  a  sterling 
bill  rises  to  a  premium  of  about  two  cents  per  sovereign.  The 
increasing  demand  for  sterling  exchange,  which  causes  such 
a  rise,  is  as  likely  to  be  due  to  an  increase  of  the  invisible 
imports  as  to  an  increase  of  visible  imports.  Indeed,  imports 
of  merchandise  may  be  declining  at  a  time  that  imports  of 
securities  are  increasing,  and  it  is  quite  possible  for  a  country 
to  have  apparently  a  "favorable"  balance  of  trade  and  yet  be 
obliged  to  export  gold  on  account  of  large  purchases  by  its 
.people  of  securities  that  have  been  held  by  foreigners,  or  on 
account  of  the  large  expenditures  of  its  people  in  foreign 
countries.  The  demand  for  exchange,  as  we  have  seen,  comes 
from  many  different  sources,  and  the  supply  of  it  is  increased 
in  different  ways.  At  no  time  are  we  justified  in  saying  that  an 
increase  in  this  or  that  item  will  result  in  a  movement  of  gold. 

When  the  United  States  imports  gold  we  have  evidence  that 
the  metal  is  worth  more  here  than  abroad.  Gold,  like  any 
other  commodity,  is  always  seeking  the  place  where  it  is  worth 
the  most.  This  truth  is  easily  understood  in  the  case  of  wheat, 
corn,  or  cotton,  but  is  not  so  readily  comprehended  in  the  case 
of  gold,  because  this  metal  is  used  as  money  and  as  such  has 
no  price.  If  the  reader  has  understood  the  conditions  creating 
the  demand  for  and  supply  of  foreign  exchange,  he  will  have 
no  difficulty  in  seeing  how  these  forces  regulate  a  country's 
supply  of  gold  strictly  in  accordance  with  its  value. 

The  United  States  is  one  of  the  leading  gold-producing 
countries  of  the  world.  Its  annual  output  in  1904  was  suffi- 
cient to  coin  over  $70,000,000.  In  some  years  this  amount 
of  gold  is  more  than  the 'United  States  needs  for  use  either 
in  the  arts  or  as  money.  How  do  we  know  when  the  United 
States  is  producing  gold  in  excess  of  its  needs?  On  this 
point  there  is  only  one  source  of  information,  namely,  the 
statistics  of  our  exports  and  imports  of  gold.  Since  it  is 


98  MONEY   AND   CURRENCY 

convenient  for  bankers  throughout  the  country  to  keep  their 
surplus  money  in  New  York  City,  because  of  the  interest  paid 
there  on  deposits,  the  new  gold  produced  in  excess  of  the 
country's  needs  soon  drifts  into  the  reserves  of  the  New  York 
banks.  Its  first  effect  is  to  depress  the  interest  rate  in  New 
York.  Its  second  effect  is  an  increase  of  loans  to  speculators 
in  stocks  and  in  produce,  and  a  lifting  of  prices  in  the  specu- 
lative markets.  The  low  rate  of  interest  in  New  York  leads  the 
bankers  of  London  and  other  European  cities  to  reduce  their 
New  York  balances,  and  such  action  creates  a  demand  for  ster- 
ling exchange  in  New  York,  for  the  New  York  correspondents 
of  the  foreign  houses,  in  order  to  remit  to  them,  are  obliged 
either  to  draw  on  their  own  London  balances  or  to  purchase 
sterling  exchange  in  the  open  market.  Furthermore  New  York 
bankers,  on  account  of  the  low  interest  rate  at  home,  are  more 
inclined  than  formerly  to  increase  their  balances  in  Europe, 
and  are,  therefore,  less  willing  to  sell  sterling  exchange.  This 
disposition  on  the  part  of  New  York  banks  tends  to  increase 
the  demand  for  sterling  exchange  and  to  lessen  the  supply  of  it 
offered  for  sale.  Thus  the  operations  of  bankers  themselves 
tend  to  cause  the  price  of  sterling  exchange  to  rise  toward  the 
gold-export  point. 

Another  force,  and  perhaps  a  stronger  one,  is  at  work  in  the 
same  direction.  The  higher  prices  for  securities  in  New  York 
set  the  machinery  of  the  arbitrage  houses  in  motion,  for  they 
are  able  to  realize  a  slight  profit  by  buying  certain  securities  in 
London  and  selling  them  the  same  day  in  New  York.  These 
transactions  result  in  an  increased  demand  for  sterling  exchange 
in  New  York,  for  the  arbitragers,  in  order  to  make  payment  for 
the  securities  which  they  purchase  abroad,  are  obliged  to  buy 
sterling  exchange. 

These  forces,  increasing  the  demand  for  sterling  and  lessen- 
ing the  available  supply,  lift  the  price  of  sterling  exchange  to 
the  gold-export  point,  and  continue  at  work  until  the  loss  of 
gold  by  New  York  has  brought  its  price  level  and  interest  rate 
to  a  parity  with  the  price  level  and  interest  rate  of  other  gold- 
standard  countries. 


DOMESTIC   AND    FOREIGN    EXCHANGE 


99 


Forces  acting  in  the  same  manner  bring  about  the  importa- 
tion of  gold  whenever  it  is  worth  more  here  than  in  other 
countries.  In  the  autumn  the  demand  for  a  common  medium 
of  exchange  in  the  United  States  is  often  greatly  increased 
by  the  harvest  requirements  of  the  West  and  South.  New 
York  is  obliged  to  ship  currency  to  the  country  banks,  and 
these  shipments  frequently  so  contract  the  operations  of  the 
New  York  banks  as  to  produce  a  fall  in  the  prices  of  stocks 
and  speculative  commodities  in  New  York  City.  New  York 
bankers  sell  London  exchange  and  reduce  their  London  bal- 
ances to  the  lowest  possible  point.  The  relatively  low  prices 
of  stocks  in  New  York  lead  to  an  increase  of  sales  to  for- 
eigners, and  so  again  the  supply  of  foreign  exchange  is  en- 
larged. This  goes  on  until  the  supply  of  exchange  is  so  far 
in  excess  of  the  demand  that  the  quotations  touch  the  gold- 
import  point  and  shipments  of  gold  are  ordered  from  London. 

The  reader  will  notice  that  in  both  cases  the  movement  of 
gold  is  the  direct  result  of  the  differences  in  the  price  levels 
of  Europe  and  America,  which  represent  differences  in  the 
value  of  gold.  He  must  not  suppose  that  the  disparity  of  prices 
is  so  great  as  to  attract  the  attention  of  the  average  man. 
Indeed,  the  average  man  is  not  in  a  position  to  detect  it,  for 
prices  in  the  United  States  are  quoted  in  dollars  and  cents, 
whereas  in  Europe  they  are  quoted  in  sovereigns,  francs,  marks, 
etc.  Nevertheless  the  prices,  whatever  the  names  used,  show 
exactly  the  purchasing  power  of  gold  in  the  different  countries. 
The  large  importer,  or  the  arbitrager  dealing  in  stocks  and 
bonds,  has  at  his  elbow  tables  of  figures  showing  precisely  the 
relation  between  American  and  European  prices.  When  there 
is  a  slight  advance  in  the  American  price  of  a  good,  without 
any  corresponding  advance  in  the  European  price,  he  at  once 
knows  what  profit  he  can  make  by  purchasing  abroad  and  selling 
at  home. 

Variations  in  the  rate  of  exchange  are  equivalent  to  changes 
in  international  price  levels.  A  rise  of  sterling  from  $4.8465 
to  $4.8865  means  a  rise  of  almost  i  per  cent  in  the  cost  to 
Americans  of  foreign  goods,  and  it  tends  to  lessen  our  imports 


100  MONEY  AND   CURRENCY 

just  as  would  an  actual  rise  in  the  prices  of  European  goods. 
At  the  same  time  this  rise  of  exchange  from  gold  point  to 
gold  point  is  equivalent  in  foreign  countries  —  or  wherever 
sterling  exchange  is  dealt  in  —  to  a  fall  of  almost  I  per  cent 
in  the  prices  of  all  American  goods,  for  the  purchasing  power 
of  the  sovereign  in  the  United  States  rises  from  $4.8465  to 
$4.8865.  Hence  American  exports  are  stimulated.  A  decline 
of  exchange  quotations,  of  course,  produces  opposite  effects, 
encouraging  imports  into  the  United  States  and  discouraging 
exports.  When  the  money  supply  of  the  United  States  is  rela- 
tively neither  excessive  nor  deficient,  the  changes  wrought  in 
our  foreign  trade  by  the  rise  and  fall  of  exchange  quotations 
are  usually  sufficient  to  prevent  any  movement  of  gold.  But  if 
the  money  supply  is  excessive,  so  that  prices  of  certain  goods 
having  an  international  market  are  above  the  price  level  in  other 
countries,  then  our  imports  of  goods  and  securities,  despite  the 
discouragement  of  rising  exchange  rates,  continue  in  excess  of 
our  exports  until  an  exportation  of  gold  becomes  profitable.  On 
the  other  hand,  if  our  money  supply  is  relatively  deficient,  our 
exports  will  be  stimulated  until  the  large  accumulations  of 
sterling  exchange  force  the  price  down  to  the  gold-import  point. 
All  these  forces  work  automatically.  No  man  engaged  in  the 
transactions  imagines  that  he  is  doing  anything  to  correct  the 
monetary  situation  of  the  world  or  to  cause  an  importation 
or  exportation  of  gold.  Although  each  person  is  seeking  per- 
sonal profit  only,  he  inevitably  contributes  to  the  general  result. 
Thus,  as  a  result  of  the  operations  of  men  in  different  countries, 
each  acting  independently  in  his  pursuit  of  profit,  the  rates  of 
foreign  exchange  in  each  country  are  so  adjusted  that  the  value 
of  gold  in  all  tends  to  be  the  same,  gold  always  moving  from 
the  country  where  prices  are  relatively  high  and  toward  the 
countries  where  prices  are  relatively  low.1 

1  The  table  on  the  following  page,  showing  the  account  of  the  United  States  with  the 
world  for  the  year  1904,  gives  an  idea  of  the  principal  operations  affecting  the  market  for 
foreign  exchange.  Only  the  first  two  items  in  each  column  are  known ;  all  the  others  are 
estimates  based  on  imperfect  knowledge  of  the  facts.  On  account  of  the  large  sales  of  Cuban, 
Mexican,  and  Japanese  bonds  in  the  United  States,  I  have  assumed  that  this  country  bought 
from  foreigners  more  securities  than  it  sold  them,  the  difference  being  $116,000,000.  The 
totals  of  the  securities  bought  and  sold  by  Americans  are  doubtless  wide  of  the  mark,  for 
there  is  no  clew  to  the  amounts  of  arbitrage  transactions. 


DOMESTIC  AND   FOREIGN    EXCHANGE:  LOI 


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: :    :  .\  k  l:  MONEY  AND  CURRENCY 

It  thus  appears  that  a  country's  balance  of  indebtedness  is 
not  determined  by  chance.  If  there  were  no  international  trans- 
actions in  debts  or  securities,  no  movements  of  capital  from  coun- 
try to  country, — in  short,  no  invisible  trade  between  nations,— 
then  the  exports  and  imports  of  merchandise  would  balance 
except  when  an  excess  of  gold  in  one  country  lifted  the  price 
level  there  and  brought  about  an  exportation  of  the  yellow 
metal.  The  invisible  elements  in  the  foreign  trade  of  nations 
complicate  the  subject,  but  introduce  no  new  principles  and  lead 
to  no  new  conclusion.  The  balance  of  trade,  so  far  as  visible 
goods  are  concerned,  may  be  more  or  less  fortuitous,  depending 
upon  the  crops  and  .upon  variations  in  the  productive  capacity 
of  a  nation  ;  but  the  whole  foreign  trade  of  a  nation,  by  which 
is  meant  its  imports  and  exports  of  goods  and  of  debts,  is 
subject  to  an  immutable  law.  The  exports  of  goods  and  debts 
always  exactly  equal  the  imports  of  goods  and  debts,  except 
when  a  balance  of  indebtedness  is  created  on  one  side  or  the 
other  by  differences  in  the  value  of  gold  in  different  coun- 
tries. This  balance  of  indebtedness,  it  should  be  noted,  is  not 
the  real  cause  of  gold  exports  or  imports,  but  is  itself  the  effect 
of  conditions  which  render  imperative  a  readjustment  of  the 
gold  holdings  of  nations. 

LITERATURE 

G.  J.  GOSCHEN,  The  Theory  of  the  Foreign  Exchanges  (i5th  edition, 
London,  1892)  is  probably  the  best  book  in  English  on  the  subject,  but  it 
is  not  free  from  the  notion  that  gold  is  shipped  in  settlement  of  a  balance. 
PIERSON,  Principles  of  Economics,  Vol.  I,  contains  an  admirable  discus- 
sion of  the  subject.  Two  books  by  GEORGE  CLARE,  The  A,  B,  C  of  the 
Foreign  Exchanges  and  A  Money-Market  Primer,  explain  the  technique 
and  practical  details  of  exchange  transactions  very  clearly  from  the  English 
point  of  view.  A.  W.  MARGRAFF'S  International  Exchange  (Chicago, 
1903)  is  intended  to  aid  the  untrained  dealer  in  exchange  and  is  full  of 
forms,  documents,  and  details.  The  beginner  will  get  help  from  CLEVE- 
LAND'S Funds  and  their  Uses. 


CHAPTER   VI 
THE  RELATION  OF  MONEY  AND  CREDIT  TO  PRICES 

70.  The  index  number  as  representative  of  the  level  of  prices.  The  arithmet- 
ical mean,  the  geometric  mean,  the  median,  and  the  harmonic  mean.  71.  The 
uses  and  defects  of  index  numbers.  72.  A  perfect  index  number  would  enable 
men  to  compare  the  changing  values  of  goods  during  a  period  of  time.  73.  Index 
numbers  prepared  by  Falkner,  Sauerbeck,  Soetbeer,  Dun's  Review,  and  the  De- 
partment of  Labor.  74.  The  price  of  a  commodity  dependent  upon  four  circum- 
stances. 75.  How  an  increase  of  the  money  supply  causes  prices  to  rise.  76.  The 
effect  of  an  increase  in  the  money  supply  upon  the  consumption  of  gold  in  the  arts 
and  upon  foreign  trade.  77.  An  illustration  showing  how  a  reduction  of  the  money 
supply  must  affect  prices.  78.  Why  an  increase  of  population  must  tend  to 
increase  the  demand  for  money  and  cause  a  decline  of  prices  if  the  supply  is 
unchanged.  79.  Why  lowered  costs  of  production  tend  to  increase  the  demand 
for  money  and  to  cause  a  fall  in  prices.  80.  Examination  of  the  common  view  that 
a  fall  of  prices  caused  by  lowered  costs  of  production  is  really  a  fall  of  values,  and 
does  not  indicate  an  appreciation  of  money.  81.  This  error  due  in  part  to  a  mis- 
conception of  the  nature  of  the  demand  for  money.  82.  It  is  due  also  to  the  con- 
founding of  real  costs  of  production  with  money  costs.  83.  Why  the  use  of  credit 
of  limited  acceptability  tends  to  lower  the  value  of  money.  84.  An  increase  in  the 
supply  of  credit  money  acts  on  prices  very  much  as  wrould  the  same  amount  of 
new  money.  85.  Prices  do  not  change  uniformly.  86.  An  illustration  showing 
the  effect  upon  prices  of  a  sudden  increase  of  the  gold  supply  in  the  United  States. 
87.  One  of  the  results  would  be  an  expansion  of  credit,  so  that  the  rise  of  prices 
would  be  out  of  proportion  to  the  increase  of  the  money  supply.  88.  In  the 
United  States  prices  would  be  affected  in  the  following  order:  stocks,  speculative 
commodities,  raw  materials,  wholesale  prices,  retail  prices,  loans,  wages,  custom- 
ary prices.  89.  A  fall  of  general  prices  is  also  irregular,  speculative  commodities 
falling  first.  90.  The  process  of  price  readjustment  is  a  gradual  one.  91.  Do 
prices  rise  in  proportion  to  an  increase  of  the  money  supply?  92.  In  countries 
using  commodity  money  there  is  never  perfect  adjustment  between  prices  and 
values.  This  maladjustment  of  prices  often  exerts  a  powerful  influence  on  indus- 
try- 93-  A  brief  sketch  of  changes  in  the  price  level  caused  by  fluctuations  in  the 
output  of  precious  metals  during  the  last  four  hundred  years. 

70.  In  this  chapter  it  is  proposed,  by  illustration  and  by 
reference  to  historical  instances,  to  show  how  and  why  varia- 
tions in  the  demand  for  and  supply  of  money  affect  the  prices 
of  goods.  We  shall  see  that  the  level  of  prices  always  tends  to 
rise  when  the  demand  for  money  falls  off  or  when  the  supply 

103 


104  MONEY  AND   CURRENCY 

is  increased,  and  that  prices  tend  downward  whenever  the 
demand  is  increased  or  the  supply  diminished.  We  shall  also 
find  that  the  prices  of  all  articles  do  not  change  uniformly,  but 
one  after  another,  and  in  such  irregular  order  as  to  interfere 
with  the  normal  exchange  values  of  goods  and  with  the  plans 
and  profits  of  business  men. 

Before  proceeding  with  this  subject  a  brief  discussion  of  the 
index  number  is  necessary.  The  purchasing  power  or  value  of 
money  varies  inversely  with  the  level  of  prices.  In  order,  there- 
fore, to  ascertain  whether  the  dollar  is  rising  or  falling  in 
value,  we  must  compare  price  levels.  The  index  number  is  the 
instrument  devised  for  this  purpose.  It  is,  as  it  were,  the  price 
of  a  composite  commodity  unit,  representing  approximately  the 
average  price  of  commodities  in  general.  In  its  calculation 
several  different  methods  are  employed. 

The  simplest  method  gives  the  arithmetical  average  of  the 
prices  of  a  number  of  representative  commodities.  It  may  be 
found  in  the  following  manner.  Suppose  that  sugar,  wheat, 
pine  lumber,  cotton,  and  quinine  are  the  commodities  selected, 
and  that  we  wish  to  ascertain  how  much  the  value  of  money 
has  changed  with  respect  to  these  during  a  certain  year.  Sup- 
pose that  prices  between  January  i  and  December  31  have 
changed  as  follows  :  Sugar  risen  from  5  cents  to  5^  cents  a 
pound,  pine  from  $15  to  $20  per  thousand  feet,  cotton  from 
10  to  15  cents  a  pound;  wheat  fallen  from  80  to  70  cents  a 
bushel,  and  quinine  from  30  to  25  cents  an  ounce.  Here  we 
have  ounces,  pounds,  and  square  feet,  —  things  we  cannot 
reduce  to  a  common  material  base.  If  we  should  simply  add 
these  prices  and  divide  by  five,  the  rise  in  the  price  of  lumber, 
although  not  so  great  proportionally  as  the  rise  of  cotton,  would 
have  a  much  greater  effect  on  the  result.  In  order  to  eliminate 
the  effect  of  unit  differences  we  must  take  of  each  commodity 
the  same  money's  worth,  and  this  we  do  by  assuming  that  100 
cents'  worth  of  each  article  is  taken  in  the  beginning,  and  by 
calculating  what  the  price  of  that  quantity  was  at  the  end  of 
the  period.  This  method  gives  the  proportional  change  on  the 
basis  of  100  in  the  case  of  each  article. 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES 


'05 


ARITHMETICAL   AVERAGE    OF   PRICES 


PRICE 
JANUARY  i 

PRICE 
DECEMBER  31 

PRICE  VARIATION 

OF  $1.00   WORTH 

Sugar  .                   .               

$     .oq 

$       .CK-J- 

$1  OO  to  &I  IO 

Wheat                                                   .     . 

80 

7O 

i  oo  to       8?4- 

Pine    

i  H.oo 

2O.OO 

I  OO  to      I  77-i- 

Cotton     .          .               .     .          ... 

IO 

.1  <\ 

I  OO  to      I   CO 

Quinine 

•?o 

2  <J 

I  OO  to         8^4- 

Totals  

ik  oo  to  $c  64.  4- 

Average 

100  to  1128 

Sugar,  it  is  evident,  rose  10  per  cent,  so  that  the  price  of  what 
on  January  i  cost  $1.00  was  on  December  31  $1.10.  A  dollar's 
worth  of  wheat  fell  to  87^-  cents,  the  decline  from  80  to  70  being 
\2\  per  cent.  Pine  rose  33!  per  cent  and  cotton  50  per  cent. 
Quinine  fell  i6|  per  cent.  The  average  of  all  five  articles  rose 
12.8  per  cent. 

This  rise  of  prices  indicates  a  decline  in  the  value  of  money 
in  respect  to  these  goods,  but  the  percentage  of  that  decline  is 
not  the  same  as  the  percentage  of  price  change.  To  ascertain 
how  much  the  value  of  money  has  fallen,  we  must  find  how 
much  less  100  cents  will  buy  at  the  end  of  the  year  than  at  the 
beginning.  Since  1 12.8  cents  will  buy  on  December  31  only  as 
much  as  100  cents  bought  January  i,  the  purchasing  power  of 
100  cents  at  the  end  of  the  year  is  evidently  only  ^  part  of  what 
it  was  at  the  beginning,  or  88.6  per  cent.  Hence  $1.00  would 
buy  on  December  31  no  more  than  $.886  bought  pn  January  i. 

If  we  could  in  this  way  average  the  prices  of  all  commodities 
at  different  times,  we  should  have  an  index  number  the  changes 
in  which  would  indicate  changes  in  the  purchasing  power  of 
money.  A  rise  of  12.8  per  cent  in  that  number  would  mean 
a  decline  of  11.4  per  cent  in  the  purchasing  power  of  money. 
The  general  law  is  this  :  Changes  in  the  index  number  show 
directly  variations  in  the  general  price  level;  changes  in  its  recip- 
rocal show  variations  in  the  value  of  money. 


106  MONEY  AND   CURRENCY 

The  arithmetical  mean,  as  the  basis  for  an  index  number,  is 
open  to  objection  because  it  exaggerates  the  effect  of  rising 
prices.  Suppose,  for  instance,  that  at  a  given  time  the  prices 
of  given  quantities  of  coffee  and  tobacco  are  each  $1.00,  and 
that  in  the  course  of  a  year  coffee  falls  to  $.50,  while  tobacco 
doubles  in  price ;  the  index  number  after  the  change,  if  com- 
puted by  the  arithmetical  mean,  would  be  125,  indicating  a 
decline  in  the  value  of  money;  whereas  it  would  appear  that 
the  value  of  money  had  not  changed,  since  it  had  gained  as 
much  in  the  case  of  one  commodity  as  it  had  lost  in  the  case 
of  the  other. 

To  overcome  this  defect  of  the  arithmetical  mean  some  econ- 
omists urge  the  use  of  the  geometric  mean,  which  is  the 
square  root  of  the  product  of  two  prices,  the  cube  root  of  the 
product  of  three  commodities,  etc.  In  the  case  above  sup- 
posed, tobacco  having  risen  to  200  and  coffee  dropped  to  50, 
the  geometric  mean  would  still  be  100,  showing  no  change 
in  the  value  of  money. 

A  third  method  adopts  the  median  as  an  index  number,  the 
median  being  the  middle  number  of  a  series,  there  being  as 
many  above  as  below  it.  A  fourth  method  yields  the  har- 
monic mean,  which  is  computed  from  the  reciprocals  of  a  series 
of  numbers.  We  will  not  stop  to  discuss  these  different 
methods.  Fortunately  it  does  not  seem  to  be  of  much  practi- 
cal moment  which  method  is  used,  for  the  results  obtained  by 
the  different  methods  do  not  vary  widely.  For  example,  index 
numbers  for  the  year  1885,  as  determined  from  the  same  data 
by  seven  different  methods,  all  fell  between  69  and  72.  It  is 
generally  agreed  that  the  difference  between  the  results  of 
different  methods  is  never  likely  to  be  great. 

DEFECTS  OF  THE  INDEX  NUMBER 

71.  We  cannot  assume  that  any  index  number  that  has  been 
constructed  gives  an  absolutely  accurate  indication  of  the  changes 
in  the  value  or  purchasing  power  of  money  during  a  long  period 
of  years.  It  is  practically  impossible  to  get  the  data  necessary 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES      107 

for  the  construction  of  an  ideal  index  number.  Retail  prices 
are  not  a  matter  of  record  ;  consequently  the  statistician  bases 
his  calculations  on  changes  in  wholesale  prices,  although  it  is 
well  known  that  these  are  not  always  accompanied  by  changes 
in  retail  prices.  Again,  human  wants  are  constantly  shifting. 
Articles  of  great  consequence  in  one  decade  may  lose  their 
importance  in  the  next  and  perhaps  cease  to  be  consumed  at  all. 
If  the  prices  of 'such  articles  have  entered  into  the  formation  of 
an  index  number,  they  must  be  dropped  and  the  prices  of  other 
articles  be  substituted.  Anything  like  absolute  accuracy  under 
such  conditions  is  evidently  impossible. 

An  index  number  should  be  deduced  from  the  prices  of  basic 
or  representative  commodities.  If  there  is  a  rise  in  the  prices 
of  such  commodities  as  iron,  copper,  coal,  lead,  wheat,  cotton, 
corn,  beef,  lumber,  and  leather,  it  is  morally  certain  that  there 
will  be  a  rise  in  the  prices  of  the  countless  articles  into  which 
these  enter  as  raw  materials.  When  an  index  number  is  derived 
from  the  prices  of  basic  commodities,  it  will  unquestionably 
record  the  general  tendencies  of  prices  and  show,  if  not  the 
exact,  at  least  the  general  changes  in  the  purchasing  power 
of  money. 

In  order  that  the  index  number  may  reflect  the  varying 
degrees  of  importance  possessed  by  different  commodities, 
methods  of  "  weighting  "  it  have  been  devised.  For  example, 
if  the  value  of  the  iron  consumed  in  the  world  is  found  to  be 
five  times  greater  than  the  value  of  the  tin  consumed,  the  price 
of  iron  may  be  used  five  times  in  the  list  of  prices  from  which 
the  index  number  is  deduced,  and  the  price  of  tin  only  once. 
As  factors  in  the  demand  for  money,  wheat  and  cotton  are  much 
more  important  than  ginger  and  pepper  ;  price  changes  in  the 
former,  therefore,  are  given  greater  weight.  However,  the 
importance  of  weighting  seems  to  be  mainly  theoretical,  for  in 
practice  statisticians  derive  about  the  same  results  from  both 
weighted  and  unweighted  tables. 

The  index  number,  it  should  be  noted,  shows  the  value  of 
money  only  with  respect  to  goods.  The  value  of  money  with 
respect  to  human  labor  can  be  discovered  only  by  an  index 


108  MONEY  AND   CURRENCY 

number  based  upon  rates  of  wages.  Such  an  index  number 
it  is  practically  impossible  to  make.  The  task  has  been 
attempted  several  times,  but  the  results  have  proved  unsatis- 
factory. Rates  of  wages  vary  so  much  in  different  communi- 
ties, and  at  different  seasons  in  the  same  community,  that  it  is 
impossible  to  determine  with  any  exactness  what  is  the  average 
wage  rate  in  a  country.  So  far  as  the  discussion  of  money  is 
concerned,  wage  changes,  as  we  shall  see  later,  are  of  far  less 
importance  than  price  changes,  so  that  when  we  speak  of  the 
value  of  money  we  need  have  in  mind  only  its  value  with 
respect  to  goods. 

72.  An  ideal  index  number,  by  revealing  variations  in  the 
value  of  money,  would  furnish  a  basis  for  an  exact  measurement 
of  changes  in  the  values  of  commodities  from  year  to  year. 
Money,  as  we  have  seen,  cannot  properly  be  called  a  unit  of 
value,  for  money  is  itself  constantly  fluctuating  in  value.  But 
since  the  index  number  measures  and  records  changes  in  the 
value  of  money,  by  its  aid  in  an  analysis  of  the  price  changes 
of  any  commodity  we  are  able  to  eliminate  the  effect  of  changes 
in  the  value  of  money  and  thus  determine  the  amount  of  varia- 
tion in  the  value  of  the  commodity  itself.  To  illustrate  :  Let 
us  suppose  that  during  a  certain  decade  the  index  number  fell 
25  per  cent,  say  from  100  to  75.  This  would  mean  that  one 
could  buy  as  much  at  the  end  of  the  decade  with  75  cents  as 
one  could  have  bought  at  the  beginning  with  a  dollar.  It  would 
show,  therefore,  an  increase  of  33!  per  cent  in  the  value  or 
purchasing  power  of  money.  Evidently  if  the  price  of  any 
article  had  fallen  exactly  25  per  cent  during  the  decade,  its 
value  would  be  unchanged.  If  the  price  of  an  article  had  fallen 
more  than  25  per  cent,  then  its  value  would  have  declined  by 
an  amount  proportionate  to  the  extent  by  which  its  decline  of 
price  exceeded  25  per  cent ;  while  if  its  price  had  fallen  less 
than  25  per  cent,  its  value  would  have  risen  in  proportion  to 
the  difference  between  its  decline  of  price  and  the  25  per  cent 
decline  in  general  prices.1  Thus,  if  our  index  number  were 

1  Suppose  that  during  the  decade  in  question  meat  did  not  change  in  price,  but 
sold  at  10  cents  a  pound.  Would  this  fact  mean  that  meat  had  not  changed  in 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES      109 

perfect,  by  comparing  the  price  changes  of  an  article  with  con- 
temporaneous changes  in  the  index  number  we  might  arrive  at 
changes  in  the  value  of  the  article.  An  ideal  index  number, 
therefore,  and  not  money,  would  deserve  to  be  called  a  unit  or 
measure  of  value. 

73.  The  index  number  most  commonly  referred  to  in  this 
country  for  the  period  from  1840  to  1891  was  prepared  by 
Dr.  R.  P.  Falkner  for  the  United  States  Senate  Committee  on 
Finance.1  From  1 840  to  1 860  the  prices  of  90  commodities  were 
used ;  between  1 860  and  1891,  the  prices  of  22 3  articles.  The  year 
1860  is  taken  as  the  base,  the  price  of  each  article  on  January  I 
of  that  year  being  assumed  to  be  100.  Falkner  used  the  arith- 
metical mean  and  made  tables  both  from  weighted  and  un- 
weighted prices.  Between  1860  and  1879  trie  standard  money 
in  this  country  was  the  depreciated  greenback.  In  order  to 
show  what  the  index  number  would  have  been  if  gold  had  been 
used  as  money,  Professor  Falkner  made  a  reduction  in  the  green- 
back index  number  proportionate  to  its  depreciation  as  indi- 
cated by  the  premium  on  gold.  This  method  was  the  only  one 
possible,  but  it  must  not  be  inferred  that  prices  would  have 
corresponded  with  this  index  number  if  the  gold  standard  had 
been  maintained. 

In  order  to  show  the  effect  of  price  changes  upon  the  welfare 
of  workingmen,  Professor  Falkner  compiled  tables  of  prices  in 
which  various  articles  were  weighted  in  proportion  to  their  esti- 
mated importance  in  the  average  workingman's  budget.  An 
index  number  computed  on  this  basis,  although  it  does  not 
reveal  changes  in  the  general  value  of  money,  is  of  great 
sociological  interest  and  importance. 


value  ?  Clearly  not,  for  money  had  risen  in  value  during  the  decade  33^  per  cent, 
and  meat  could  not  have  maintained  a  steady  exchange  relation  with  money  unless 
its  value  had  also  risen  in  the  same  proportion.  Suppose  now  that  meat  during 
the  decade  fell  in  price  from  10  cents  to  9  cents.  What  change  in  the  value  of 
meat  wrould  that  decline  in  its  price  indicate  ?  Since  the  price  of  meat  had  fallen 
from  100  to  only  90,  while  the  prices  of  things  in  general  were  falling  from  100  to 
75,  it  follows  that  the  value  of  meat  with  respect  to  things  in  general  had  risen  in 
the  proportion  of  75  to  90,  i.e.  20  per  cent. 

1  Aldrich  Report  on  Wholesale  Prices,  etc.  (government  document). 


HO  MONEY  AND   CURRENCY 

The  Falkner  index  number  has  been  continued  by  the  Depart- 
ment of  Labor  at  Washington,  but  with  some  modifications. 
The  base  line  is  the  average  of  prices  for  the  period  from  1 890 
to  1899,  and  the  prices  of  259  commodities  are  used,  an  effort 
being  made  to  get  the  average  yearly  price  of  each.  It  is  pro- 
posed to  continue  this  index  number  by  annual  publications  in 
the  bulletin  of  the  department.1 

The  first  index  number  derived  from  English  prices  with  any 
show  of  scientific  accuracy  was  published  in  1863  by  the  well- 
known  economist  W.  Stanley  Jevons.2  Jevons  based  his  calcu- 
lations upon  the  prices  of  39  articles,  and  first  found  their 
average  prices  for  the  period  from  1845  to  I^5O,  calling  that 
price  100.  His  index  number  covered  the  period  from  1844 
to  1862  and  was  prepared  in  order  to  measure  the  effect  the 
new  gold  from  California  and  Australia  had  exerted  upon  prices. 
His  study  of  this  subject  is  a  classic  in  the  literature  of  finance. 

The  index  number  most  commonly  referred  to  in  the  English- 
speaking  world  is  that  of  the  London  Economist.  It  is  practi- 
cally a  continuation  of  the  Jevons  number.  The  base  is  the 
same,  being  the  average  for  the  period  1845-1850,  and  the  same 
39  articles  are  used,  although  by  grouping  they  have  been 
reduced  to  22  quotations.3  Jevons  employed  the  geometric 
mean,  while  the  Economist  gives  the  simple  arithmetical  aver- 
age. One  of  the  defects  of  the  Economist's  number  is  the 
necessary  consequence  of  the  small  number  of  articles  upon 
which  it  is  based  ;  a  great  rise  in  the  price  of  any  one  of  these 
articles  causes  an  excessive  change  in  the  index  number.  For 
example,  the  price  of  cotton  rose  enormously  during  the  Civil 
War,  but  this  rise  in  its  price  did  not  indicate  a  corresponding 
fall  in  the  purchasing  power  of  money,  for  during  that  period 

1  See  Bulletin  of  the  Department  of  Labor  for  March,  1902,  1903,  1904,  and  1905. 
In  Bulletin  No.  2j  Dr.  Falkner  published  a  continuation  of  his  index  number  to 
1899. 

2  See  Investigations  in  Currency  and  Finance,  —  chapter  on  "  A  Serious  Fall  in 
the  Value  of  Gold,"  etc. 

3  Coffee,  cotton,  Pernambuco  cotton,  cotton   yarn,  cotton  cloth,  sugar,   tea, 
tobacco,  butcher's  meat,  wheat,  wool,  raw  silk,  flax  and  hemp,  indigo,  oil,  timber, 
tallow,  leather,  copper,  iron,  lead,  tin. 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES      1 1  i 

cotton  as  an  article  of    English    trade  did  not  possess  great 
relative  importance. 

A  much-quoted  index  number  is  that  published  annually  by 
Mr.  Augustus  Sauerbeck  in  the  Journal  of  tJie  Royal  Statistical 
Society.  His  base  line  is  the  average  prices  of  1867-1877,  and 
he  employs  the  simple  arithmetical  average.  He  uses  the  prices 
of  37  articles  and  does  not  "  weight "  them  except  as  he  intro- 
duces two  or  three  grades  of  the  more  important  commodities. 
This  index  number  is  criticised  because  all  of  the  articles  are' 
raw  products,  such  as  wheat,  coal,  iron,  leather,  cotton,  etc. 
The  objection  does  not  seem  sound,  for  if  the  prices  of  raw 
materials  change,  the  fact  is  certain  to  be  reflected,  even  though 
to  a  lesser  degree,  in  the  prices  of  manufactured  goods. 

One  of  the  most  carefully  prepared  index  numbers  is  that  of 
Dr.  Soetbeer,  made  from  Hamburg  prices  and  covering  the 
period  from  1841  to  1891.  It  is  based  upon  the  average  prices 
of  1 14  commodities.  In  so  far  as  possible  he  obtained  the 
quantity  of  each  commodity  imported  into  Hamburg  and  the 
price  paid  for  each  consignment ;  then  by  simple  division  he 
obtained  the  average  price. 

A  convenient  table  of  prices  is  published  each  month  in  this 
country  by  Dun's  Review.  No  base  line  is  taken,  the  index 
number  being  merely  a  total  of  all  the  prices.  As  the  prices 
of  350  articles  are  given,  changes  in  the  totals  are  undoubtedly 
indicative  in  a  general  way  of  changes  in  the  purchasing  power 
of  money.1 

The  table  on  the  following  page  gives  the  index  numbers 
of  Sauerbeck,  of  the  Economist,  of  Soetbeer,  of  Falkner,  and  of 
the  Department  of  Labor.  The  Falkner  number  is  continued 
from  1891  to  1904  by  reduction  of  the  number  calculated  by  the 
Department  of  Labor.  The  second  column  shows  the  average  of 
prices  that  prevailed  in  the  United  States  from  1862  to  1878  ; 
the  first  column  gives  for  that  period  the  corresponding  gold 
prices  based  on  the  depreciation  of  the  greenback. 

1  For  a  more  detailed  discussion  of  index  numbers  see  Bowley's  Elements  of 
Statistics,  Laughlin's  Principles  of  Money,  chap,  vi,  and  the  Bulletin  of  the 
Department  of  Labor  for  March,  1902. 


I  12 


MONEY  AND   CURRENCY 


STANDARD  INDEX  NUMBERS  (1860-1904) 


FALKNER  (1860=  100) 

U.S. 
DEPARTMENT 
OF  LABOR 

SAUERBECK 
(BASE 
1867-1877) 

"ECONOMIST" 
(BASE 
1845-1850) 

SOETBEER 
(BASE 

I847-X850) 

GOLD 

PAPER 
(1862-1878) 

1860 
1861 
1862 
1863 
1864 

IOO.O 
IOO.6 
114.9 
102-4 
122-5 

117.8 
148.6 
190.5 

99 
98 

IOI 

103 

105 

122 
124 

J31 
159 

172 

I2I.O 

118.1 

122.6 

125.5 
129.3 

1865 
1866 
1867 
1868 
1869 

IOO.3 

!36-3 
127.9 

"5-9 
113.2 

216.8 
191.0 
172.2 
160.5 
153-5 

IOI 
IO2 
IOO 

162 
162 
J37 

122 
121 

122.6 
125.8 
124.4 
I22.O 
123.4 

1870 
1871 
1872 

1873 
1874 

"7-3 
122.9 
127.2 

I22.O 
1194 

142.3 
136.0 
138.8 
137-5 
133-0 

96 

IOO 

109 

III 

102 

122 

118 

129 
134 

131 

122-9 
127.0 
135.6 

138.3 
136.2 

1875 
1876 

1877 
1878 
1879 

II3-4 
104.8 
104.4 

99-9 
96.6 

127.6 

118.2 
110.9 
101.3 

96.6 

96 

95 
94 

87 
83 

126 
I23 
I23 

116 

IOO 

129.8 
128.3 
127-7 
I2O.6 

117.1 

1880 
1881 
1882 
1883 
1884 

106.9 

105-7 
108.5 
1  06.0 
994 

88 

85 
84 
82 
76 

"5 
1  08 
in 
106 

IOI 

121.9 

I2I.O 
122.  1 
122.2 
II4.2 

1885 
1886 
1887 
1888 
1889 

93-° 
91.9 
92.6 
94.2 
94.2 

72 

70 

72 

95 
92 
94 

IOI 

99 

I08.7 
IO4.O 
IO2.O 
102.0 
1  06.  1 

1890 
1891 
1892 

1893 
1894 

92-3 
92.2 
87.6 
87.2 
79-3 

112.9 
III.7 
1  06.  1 
105.6 
96.1 

72 
72 
68 
68 
63 

1  02 

IOI 

9l 
96 

95 

I08.I 
109.2 

1895 
1896 
1897 
1898 
1899 

77.2 
74-6 
74.0 
77-i 
83-9 

93-6 

93-4 
101.7 

62 
61 
62 

64 
68 

87 

ti 
8 
86 
87 

1900 
1901 
1902 
1903 
1904 

91.2 
88.5 
93-2 
93-7 
93-3 

110.5 
108.5 
112.9 
113.6 
113.0 

75 
70 
69 
69 

70 

97 
97 
89 

91 

100 

RELATION  OF  MONEY  AND  CREDIT  TO  PRICES      113 

PRICES  AND  THE  MONEY  SUPPLY 

74.  The  price  of  any  particular  good,  since  it  represents  the 
amount  of  money  for  which  the  good  exchanges,  must  be  affected 
by  any  alteration  either  in  the  value  of  the  good  or  in  the  value  of 
money.    Changes  in  the  price  of  a  commodity,  therefore,  may 
be  brought  about  in  four  different  ways :  by  a  change  (i)  in  the 
demand  for  the  commodity ;  (2)  in  the  supply  of  the  commod- 
ity ;  (3)  in  the  demand  for  money ;  (4)  in  the  supply  of  money. 
Changes  of  the  first  and  second  kind  change  the  value  of  the 
commodity,   and  will   be   considered   in  this   chapter  only  in 
so  far  as  changes  in  the  supply  of  commodities,  by  altering 
the  total  volume  of  exchanges,  affect  the  demand  for  money. 
Changes  of  the  third  and  fourth  kind  directly  affect  the  value 
of  money,  and  it  is  the  purpose  of  this  chapter  to  show  by 
concrete  illustration  how  such  changes  act  upon  prices. 

A  change  in  the  general  level  of  prices  means  a  change  in 
the  purchasing  power  or  value  of  money,  and  can  be  brought 
about  only  by  circumstances  which  affect  either  the  demand 
for  or  supply  of  money.  A  rise  in  prices  must  ensue  if  the 
demand  for  money  declines  more  rapidly  than  the  supply,  or  if 
the  supply  increases  more  rapidly  than  the  demand ;  and  a  fall 
of  prices  results  if  changes  the  opposite  of  these  take  place. 
Under  no  other  conditions  can  .the  value  of  money  (or  the 
general  level  of  prices)  be  raised  or  lowered. 

75.  We  will  first  consider  the  manner  in  which  a  change  in 
the  supply  of  money  affects  prices.    Let  us  suppose  that  the 
supply    of    money    in    the    United    States    has    been    greatly 
increased  during  a   certain  month  by  an  influx  of  new  gold 
from    the    mines    of   Alaska,    California,   and    Colorado.    The 
miners  will  turn  their  gold  over  to  the  United  States  Mint  and 
receive    money    or    currency   in    exchange.1    This   money  the 

xThe  miner  turns  his  gold  over  to  the  United  States  Mint  and  receives  a 
check  on  the  Treasury  at  the  rate  of  $20.67  Per  ounce  pure  gold,  less  the 
expense  of  assaying  and  refining.  This  check  is  payable  in  legal  tender  and  is 
accepted  like  any  other  check.  The  cash  paid  out  by  the  Treasury  in  exchange 
for  gold  is  replaced  by  the  coin  into  which  the  gold  is  minted.  Theoretically  the 
miner  takes  gold  to  the  mint  in  the  raw  state  and  carries  away  the  same  gold 


1 14  MONEY  AND    CURRENCY 

miners  will  probably  dispose  of  in  one  of  four  ways  :  (i)  hoard 
it ;  (2)  buy  goods  with  it ;  (3)  lend  it ;  (4)  deposit  it  in  banks. 
Such  money  as  the  miners  hoard,  which  will  probably  be  very 
little,  can  have  no  effect  on  prices  until  it  is  spent  in  the  pur- 
chase of  goods.  But  most  of  them  will  make  the  natural  and 
reasonable  disposition  of  their  money;  each  will  spend  more  or 
less  for  the  satisfaction  of  his  present  wants,  will  keep  a  certain 
sum  for  the  satisfaction  of  future  wants,  and  will  either  lend 
the  balance  or  deposit  it  in  a  bank.  That  portion  which  is 
spent  will  constitute  a  new  demand  for  certain  classes  of  goods 
and  will  tend  to  raise  their  prices.  That  portion  which  is 
loaned  will  be  expended  by  the  borrowers  in  the  purchase  of 
goods  and  payment  of  wages,  and  will  tend  to  advance  both 
prices  and  wages. 

Let  us  suppose  that  the  banking  reserves  of  the  country  are 
increased  $50,000,000  by  the  deposits  of  these  miners.  Will 
this  money  lie  idle  and  so  have  no  effect  on  prices?  Certainly 
not.  It  will  be  the  most  potent  part  of  the  new  supply. 
Bankers  are  the  last  people  in  the  world  to  look  with  com- 
placence upon  a  hoard  of  idle  money.  Their  dividends  depend 
upon  their  power  to  make  a  dollar  do  twofold  or  fourfold  work. 
The  banks  that  receive  this  $50,000,000  of  new  money  will  not 
rest  till  they  have  found  borrowers,  even  though  they  are 
obliged  to  lower  their  rate  of  discount.  That  $50,000,000  may 
be  made  the  basis  for  an  expansion  of  bank  credit  to  the 
amount  of  $200,000,000  or  even  $300,000,000,  and  the  bor- 
rowers of  this  credit  will  buy  goods  and  labor.  Thus  the  new 
gold,  in  the  form  of  currency  or  bank  credit,  will  gradually 
increase  the  demand  for  various  goods  and  so  cause  their  prices 
to  rise.  Since  there  is  no  reason  why  the  demand  for  other 
goods  should  have  fallen  off,  the  general  price  level  will  have 
been  raised,  indicating  a  decline  in  the  value  of  money. 

76.  In  the  foregoing  illustration  it  is  tacitly  assumed  that  none 
of  the  new  gold  is  at  once  taken  by  jewelers  and  others  for  use  in 
the  arts,  and  this  assumption  is  justified,  for  there  is  no  reason 

coined  ;  but  practically  he  is  given  cash  at  once  for  his  gold  and  does  not  have  to 
wait  till  it  is  coined. 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES     115 

for  supposing  that  the  demand  of  manufacturers  for  gold  will 
increase  until  gold  has  actually  fallen  in  value,  —  that  is,  until 
the  prices  of  goods  have  risen.  Of  the  new  gold  added  to  the 
world's  stock  each  year  it  is  estimated  that  about  20  per  cent 
is  absorbed  by  the  arts'  demand,  but  there  is  little  evidence  that 
the  consumption  of  gold  in  this  way  increases  as  its  value  falls. 
The  charm  of  gold  as  an  ornament  lies  in  its  value  almost  as 
much  as  in  its  beauty. 

An  important  secondary  effect  remains  to  be  noted.  We 
assumed  an  addition  of  at  least  $50,000,000  to  our  money  sup- 
ply at  a  time  when  the  demand  for  money  was  not  increasing, 
and  saw  that  a  rise  of  prices  must  result.  Unless  something 
had  happened  to  lower  the  value  of  gold  elsewhere  at  the  same 
time,  the  price  level  of  this  country  would  rise  above  that  of 
other  gold-standard  countries.  Our  imports  would  in  conse- 
quence increase  and  our  exports  decrease,  and  thus  a  balance 
of  international  indebtedness  would  be  created  that  would  com- 
pel an  export  of  gold  from  the  United  States.  Thus,  in  accord- 
ance with  the  law  providing  for  the  automatic  distribution  of 
gold,  explained  in  Chapters  II  and  V,  each  country  would  finally 
get  its  proportionate  share  of  the  new  supply  and  prices  in  all 
gold-standard  countries  would  ultimately  be  lifted  in  the  same 
degree. 

77.  To  see  how  a  reduction  in  the  supply  of  money  would 
affect  prices,  let  us  suppose  that  the  United  States  government 
during  a  certain  month,  as  a  result  of  bond  sales  or  increased 
taxation,  takes  $50,000,000  from  circulation  and  holds  it  in  the 
Treasury's  vaults  at  Washington.  Even  though  this  currency 
comes  in  the  first  instance  from  the  pockets  of  the  people,  it 
will  lead  to  a  corresponding  reduction  of  the  banking  reserves, 
for  the  need  of  the  people  for  currency  as  a  medium  of  ex- 
change and  store  of  value  will  not  immediately  be  affected,  and 
that  need  the  banks  must  supply.  The  banks,  their  reserves 
having  declined  $50,000,000,  will  be  obliged  to  call  loans  and 
reduce  their  liabilities  by  something  like  $200,000,000.  This 
contraction  of  credit,  whether  accompanied  by  a  rise  of  the 
rate  of  interest  or  not,  will  mean  a  reduction  in  the  volume 


lib  MONEY  AND   CURRENCY 

of  available  purchasing  power,  and  certain  business  men  will  be 
obliged  to  suspend  or  narrow  their  operations.  The  demand 
for  goods  and  labor  will  fall  off  and  many  sellers  will  find  them- 
selves obliged  to  lower  prices  in  order  to  attract  buyers. 

PRICES  AND  THE  MONEY  DEMAND 

78.  A  change  in  the  demand  for  money,  as  was  shown  in 
Chapter  IV,  is  less  easily  measured  than  a  change  in  the 
supply,  yet  its  effect  upon  the  value  of  money,  and  hence  upon 
prices,  is  quite  as  important.  An  increase  in  the  demand  for 
money  may  result  (i)  from  an  increase  in  the  volume  of  ex- 
changes, (2)  from  a  contraction  of  credit,  or  (3)  from  a  lessened 
rapidity  of  circulation.  The  third  cause,  as  already  shown, 
amounts  to  an  increase  in  the  need  for  money  to  serve  as  a 
so-called  store  of  value  for  future  use,  and  is  nowhere  sub- 
ject to  great  fluctuations.  The  volume  of  exchanges  within  a 
country  depends  mainly  upon  the  number  of  its  people  and  the 
quantities  of  goods  produced.  Let  us  consider  how  changes 
in  these  must  affect  the  demand  for  money  and  so  the  level 
of  prices. 

That  an  increase  of  population,  if  the  use  of  credit  is  not 
equally  enlarged,  must  be  accompanied  by  an  increased  need 
for  money  is  evident.  If  the  population  of  a  country  grows  from 
ten  million  to  eleven  million,  methods  of  production  and  busi- 
ness remaining  the  same,  the  need  for  money  as  a  medium  of 
exchange  and  as  a  basis  of  credit  will  increase  in  the  same  pro- 
portion. If  the  supply  of  money  has  not  also  increased  10  per 
cent,  assuming  that  there  has  been  no  enlarged  use  of  credit, 
the  value  of  money  will  have  increased  and  the  prices  of  goods 
in  general  will  have  fallen.  It  is  not  easy  to  find  a  country  in 
which  these  conditions  have  all  existed  for  any  period,  for  most 
countries  during  the  last  century  have  used  freely  coined  gold 
and  silver  as  money,  so  that  the  supply  has  never  been  constant. 
India,  however,  between  1893  and  1897,  when  the  free  coinage 
of  silver  was  not  permitted,  furnished  a  fairly  good  illustration 
of  what  will  happen  when  the  supply  of  money  does  not  increase 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES     117 

as  the  population  grows.  The  value  of  the  silver  rupee,  which 
remained  the  monetary  unit  of  India  until  1899,  when  the  gold 
standard  was  adopted,  steadily  rose  above  the  value  of  the 
bullion  it  contained,  and  prices  tended  downward.1 

As  we  have  already  seen  (Chapter  IV),  it  must  not  be  con- 
cluded that  the  supply  of  money  should  increase  in  the  same 
ratio  as  the  population.  The  other  important  conditions  seldom 
remain  unchanged;  the  development  of  credit,  especially  during 
the  last  half  century,  has  tended  to  lessen  the  need  for  money 
and  so  to  counteract  the  influence  of  the  growth  of  population. 

79.  An  increase  in  the  volume  of  exchanges,  due  to  improved 
methods  of  production  (i.e.  lowered  costs),  tends  to  increase  the 
demand  for  money  and  to  cause  a  fall  in  prices.  If  a  country's 
production  of  wealth  is  increased  by  improvements  in  machin- 
ery or  by  a  more  efficient  application  of  labor,  it  must  follow 
that  a  greater  volume  of  goods  will  be  exchanged,  and,  there- 
fore, that  more  money  will  be  needed  than  formerly  to  effect 
exchanges  at  the  old  level  of  prices.  If  the  improvements 
in  production  have  been  general  in  their  application,  lowering 
the  costs  and  increasing  the  supply  of  most  articles  consumed 
by  men,  the  values  of  goods  in  general  will  not  have  been 
affected ;  each  man  on  the  average  having  doubled  his  produc- 
tion, goods  will  exchange  at  the  same  ratios  as  before  and  have 
the  same  values.  For  example,  if  the  shoemaker  has  doubled 
his  productive  capacity  at  the  same  time  that  the  farmer  has 
doubled  his,  a  pair  of  shoes  will  cost  the  farmer  no  more  bushels 
of  wheat  than  formerly ;  in  other  words,  the  value  of  wheat  in 
shoes  will  remain  unchanged.  But  if,  while  this  process  has 
been  going  on,  the  supply  of  money  has  not  also  been  doubled, 
it  is  evident  that  each  dollar  will  be  called  on  to  exchange  twice 
as  many  goods  as  before,  and  that  it  will  have  twice  the  value 
it  formerly  had ;  that  is,  prices  will  have  fallen  50  per  cent. 

In  this  illustration  it  should  be  noted  that  the  influence  which 
credit  might  have  had  upon  the  change  of  prices  has  been  left 
out  of  account.  If  while  production  is  doubling  on  account  of 
improvements  the  use  of  credit  is  enlarged,  then  the  increased 

1  Details  are  given  in  Chapter  XIV. 


Il8  MONEY  AND  CURRENCY 

demand  for  a  medium  of  exchange  may  be  fully  met  by  credit, 
so  that  there  will  be  no  change  whatever  in  the  general  level  of 
prices.  In  the  nature  of  things,  however,  there  is  no  reason 
why  the  use  of  credit  should  increase  at  a  pace  equal  to  an 
increase  in  the  demand  for  a  medium  of  exchange.  Increased 
use  of  credit  depends,  as  is  shown  in  Chapter  III,  upon  increas- 
ing confidence  and  upon  improvements  in  credit  machinery. 

80.  The  fall  of  prices  caused  by  an  increase  in  the  produc- 
tion of  wealth  as  a  result  of  improvements  has  been  a  matter 
touching  which  there  has  been  much  misapprehension.    People 
usually  think  of  such  a  fall  of  prices  as  being  the  result  of  a  fall 
in  the  values  of  commodities  rather  than  of  a  rise  in  the  value  of 
money,  and  some  economists  have  taken  the  same  view.    It  is 
important  to  be  clear  upon  this  point.    The  popular  misappre- 
hension is  easily  explained.     When  an  improvement  in  the  pro- 
duction of  any  particular  commodity  lowers  its  cost,  the  fall  in 
its  price  is  actually  indicative  of  a  fall  in  its  value  or  exchange 
power.    Naturally,  therefore,  when  improvements  throughout  the 
whole  field  of  industry  are  reducing  costs  and  are  bringing  into 
the  markets  larger  quantities  of  goods,  people  assume  that  the 
resultant  general  decline  of  prices  represents  a  general  decline 
of  values.    That  this  assumption  cannot  be  true  a  moment's 
thinking  about  the  meaning  of  value  will  show.    The  value  of  a 
good  is  its  purchasing  power,  —  its  exchange  relation  with  other 
goods, — and  is  measured  by  the  quantities  of  other  goods  for 
which  it  will  exchange.    That  a  general  fall  or  rise  of  the  values 
of  goods  is  an  absurdity  was  shown  in  Chapter  II.    A  general 
fall  of  the  prices  of  goods  means  merely  that  money  buys  more 
than  formerly,  i.e.  that  the  value  of  money  has  risen.    It  can 
mean  nothing  else,  and  the  cause  of  the  increased  value,  under 
the  conditions  of  our  hypothesis,  lies  in  the  increased  demand 
for  money  due  to  the  offer  for  it  of  larger  quantities  of  goods. 

81.  Despite  the  a  priori  simplicity  of  this  proposition  writers 
of  some  standing  refuse  to  accept  it,  holding  that  a  fall  of  prices 
resulting  from  lowered  costs  of  production  does  not  mean  an 
appreciation  of  money.     Such  a  fall  of  prices,  they  say,  is  born 
of  forces  touching  commodities  only;  and  then  in  great  detail 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES      119 

they  show,  in  the  case  of  one  commodity  after  another,  how 
some  new  process  or  machine  leads  to  a  decline  in  its  value  and 
so  of  its  price.  How,  it  is  asked,  can  the  value  of  money  have 
been  affected  when  none  of  these  forces  has  in  the  remotest 
way  touched  money? 

Their  error,  apart  from  the  twist  they  give  the  words  "value" 
and  "  appreciation,"  seems  to  lie  in  a  misconception  of  the 
nature  of  the  demand  for  money.  That  tends  to  vary,  as  has 
been  shown,  with  the  quantity  of  goods  exchanged,  and  any 
circumstance,  whether  a  rising  birth  rate,  a  steam  plow,  or  a 
rotary  printing  press,  which  leads  to  an  increased  production 
and  sale  of  goods,  acts  directly  upon  it,  tending  to  cause  the 
value  of  money  to  rise  and  prices  in  general  to  fall.  As  each 
commodity  is  affected  by  the  improvement  in  its  production,  its 
value  certainly  falls  as  does  its  price  ;  but  as  the  process  goes 
on  there  is  a  constant  readjustment  of  valuations.  The  values 
(but  not  the  prices)  of  those  commodities  first  affected  rise 
whenever  an  improvement  forces  down  the  value  of  another 
commodity,  until  at  the  end,  if  the  costs  of  all  commodities 
have  been  lowered,  we  have  the  same  exchange  relations 
between  commodities  that  existed  before  the  era  of  improve- 
ments began.  Money,  if  its  supply  has  not  also  increased,  will 
have  risen  in  value  because  of  the  increased  demand  for  it,  that 
is,  because  more  goods  are  offered  for  it. 

A  fall  of  costs  due  to  improvements  can  lead  to  no  general 
fall  of  prices  except  by  increasing  the  quantities  of  goods 
produced.  Take,  for  example,  an  improvement  in  the  manu- 
facture of  automobiles,  which  brings  their  average  price  down 
from  $1000  to  $500.  If  the  reduction  did  not  lead  to  twice 
the  former  sales,  an  upward  tendency  would  be  given  to  the 
prices  of  other  articles,  for  an  increased  amount  of  the  commu- 
nity's available  money  and  credit  would  be  offered  for  them. 
If,  on  the  other  hand,  the  sales  of  automobiles  should  more 
than  double,  and  so  absorb  more  of  the  country's  available 
money  and  credit  than  formerly,  the  demand  for  other  articles 
would  necessarily  be  weakened,  and  we  should  have  a  fall  in 
the  prices  of  articles  whose  costs  had  not  been  lowered. 


120  MONEY  AND   CURRENCY 

82.  Another  source  of  confusion  on  this  subject  is  the  tend- 
ency of  some  writers  to  confuse  real  costs  of  production  with 
money  costs.  Such  writers  will  object  to  the  conclusions  in  the 
foregoing  paragraphs  on  the  ground  that  a  change  in  price  is 
assumed  without  a  corresponding  change  in  the  cost  of  pro- 
duction, which  in  the  long  run  determines  the  prices  of  most 
goods.  This  objection  is  not  well  grounded.  To  a  business 
man  the  amount  of  money  he  spends  in  producing  or  obtaining 
a  commodity  is  most  important;  it  is  the  only  "  cost "  which  he 
knows ;  and  the  article  cannot  long  sell  under  that  sum.  If  the 
relation  of  money  to  goods  remained  always  the  same,  that 
is,  if  the  value  of  money  were  stable,  changes  in  this  money 
cost  (or  expense,  as  it  is  called  by  economists)  would  coincide 
with  changes  in  real  costs  of  production.  By  real  cost  of  pro- 
duction is  meant  the  total  value  of  the  goods  consumed  in  the 
production  of  an  article,  —  the  value  of  the  raw  material,  of  the 
means  of  subsistence  given  to  laborers,  and  of  a  certain  amount 
of  plant  and  machinery.  Real  costs  are  not  changed  by  a  gen- 
eral rise  or  fall  of  prices,  and  it  is  these  real  costs  which  in  the 
long  run  fix  the  values  of  goods  produced  under  conditions  of 
free  competition. 

For  example,  if  general  prices  rise  5  per  cent  during  a  cer- 
tain year,  money  costs  will  increase  5  per  cent,  for  the  raw  mate- 
rial, etc.,  necessary  for  the  production  of  a  particular  article 
will  cost  5  per  cent  more  money ;  but  there  will  be  no  increase 
on  this  account  in  real  costs,  for  the  rise  of  prices  will  not  make 
necessary  increased  quantities  of  materials,  machinery,  or  labor. 

This  distinction  between  real  costs  and  money  costs  is  one 
that  the  reader  must  clearly  understand,  for  any  misconception 
here  will  lead  him  into  quicksand.  He  must  see  clearly  that  it 
is  possible  for  prices  to  be  rising  even  at  a  time  when  real  costs 
of  production  are  falling.  Something  of  that  kind  happened 
during  the  five  years  following  1 898.  During  this  quinquennium 
there  was  no  break  in  the  quickstep  of  industry,  no  folding  of 
hands  on  the  part  of  inventors  or  entrepreneurs ;  real  costs  of 
production  surely  declined  just  as  they  did  in  the  seventies  and 
eighties;  yet  the  prices  of  commodities  rose  some  25  per  cent 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES     121 

and  the  money  costs  of  almost  all  articles  advanced  in  pro- 
portion. That  the  per  capita  production  of  wealth  increased 
during  this  period  there  is  no  reason  to  doubt. 


INFLUENCE  OF  CREDIT 

83.  An  increase  in  the  use  of  credit,  since  it  lessens  the 
demand  or  need  for  money  by  rendering  the  existing  supply 
more  efficient,  is  practically  equivalent  to  an  increase  of  the 
money  supply,  and  therefore  tends  to  cause  a  rise  in  prices.  This 
proposition  has  already  been  explained  in  a  general  way.  Here 
we  shall  consider  briefly  the  different  degrees  of  influence 
-exerted  by  the  different  kinds  of  credit. 

Any  circumstances  tending  to  increase  the  use  of  credit  of 
limited  acceptability,  such  as  checks,  bills  of  exchange,  and 
promissory  notes,  tends  to  lower  the  value  of  money  and 
raise  the  level  of  prices.  That  such  an  expansion  of  credit 
would  actually  lift  prices  unless  its  influence  were  counteracted 
by  an  opposing  force,  such  as  a  reduction  in  the  supply  of 
money  or  an  increase  in  the  demand  for  money,  cannot  be 
denied  if  we  have  correctly  conceived  the  relation  of  credit  to 
money ;  yet  upon  this  point  there  has  been  considerable  vague 
writing  and  no  little  disagreement  among  economists.  Writers 
who  admit  that  bank  notes  and  government  credit  money  may 
influence  prices  deny  that  checks  and  promissory  notes  possess 
such  power,  holding  that  these  latter  are  born  of  the  trans- 
action which  they  consummate,  and,  therefore,  that  the  demand 
for  money  is  not  touched.1 

Such  writers,  it  will  be  found,  usually  have  a  wrong  conception 
of  the  nature  of  credit,  regarding  it  as  something  independent 

1  To  suppose  that  the  "  deposit  currency  "  raises  prices  by  increasing  general 
purchasing  power  in  proportion  to  its  increase  in  volume,  is  like  supposing  that 
an  increase  of  tickets  increases  the  number  of  chairs  at  the  opera.  In  "  deposit 
currency  "  an  increase  of  transactions  brings  with  it,  as  a  necessary  consequence, 
the  medium  by  which  exchanges  are  made ;  and  offsetting  goods  against  each 
other  could  not  raise  general  prices.  —  Laughlin's  Principles  of  Money,  pp.  137—138. 
There  is  no  analogy  between  an  opera  ticket  and  a  bank  check,  and  never  will  be  un- 
less a  system  of  wireless  telephonies  some  day  makes  a  ticket  as  satisfying  as  a  seat. 


122  MONEY  AND  CURRENCY 

of  and  distinct  from  money.  The  difference  between  buy- 
ing with  credit  and  with  money  in  hand  is  very  slight;  in  both 
cases  money  is  the  thing  with  which  the  buying  is  done,  only 
in  the  credit  purchase  the  delivery  of  the  money  is  promised 
at  a  later  date.  If  men  go  into  a  market  offering  checks  for 
commodities,  they  will  influence  prices  just  as  much  as  if  they 
should  offer  cash  or  money  in  hand.  In  fact,  when  they  offer 
checks  in  payment  they  are  really  offering  money,  but  for 
convenience  to  both  buyer  and  seller  delivery  is  delayed.  A 
commercial  traveler  does  not  carry  with  him  the  goods  he  sells, 
often  not  even  a  sample;  must  we  conclude,  therefore,  that  a 
drummer  for  the  rubber  trust  is  not  selling  gum  shoes,  and 
that  his  sales  will  not  leave  the  retailer's  demand  for  rubbers 
less  than  it  was  before  his  trip  ? 

But,  it  may  be  asked,  if  credit  in  the  form  of  checks  and 
drafts  has  such  an  effect  on  prices,  how  does  it  happen  that  the 
great  volume  of  these  credit  instruments  created  every  day 
does  not  keep  the  level  of  prices  in  a  state  of  constant  agitation? 
A  reply  to  this  question  will  bring  to  light  two  facts  worth 
noting.  First,  in  ordinary  times,  when  the  conditions  establish- 
ing confidence  are  unchanging,  there  is  no  reason  why  credit 
from  day  to  day  should  effect  a  greater  or  less  proportion  of  a 
country's  exchanges.  In  other  words,  there  is  no  reason  why 
there  should  be  more  or  less  buying  with  credit  to-day  than 
there  was  yesterday,  and  hence  no  reason  why  prices  should  rise 
or  fall  to-day.  But  let  something  happen  to  fire  the  hopes  of 
men,  then  in  the  stiffening  price  lists  we  see  the  immediate  effect 
of  a  larger  use  of  credit ;  or  let  disaster  threaten,  and  a  sudden 
decline  of  prices  records  the  contraction  of  credit.  Having  in 
mind  ordinary  times,  therefore,  we  may  say  that  the  use  of 
credit  of  limited  acceptability,  like  checks  and  drafts,  keeps 
prices  at  a  higher  level  than  they  would  maintain  if  such  credit 
were  not  used.  That,  it  will  be  noticed,  is  equivalent  to  saying 
that  the  use  of  such  credit  in  ordinary  times  keeps  prices  from 
falling.  Anything,  however,  which  affects  the  confidence  upon 
which  credit  is  based  must  affect  its  use  and  so  cause  a  change 
in  the  price  level 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES     123 

The  second  point  to  be  noted  in  this  connection  is  the  fact 
that  violent  changes  in  prices  are  usually  the  result  of  expan- 
sion or  contraction  in  the  volume  of  credit  of  limited  accepta- 
bility. This  fact  receives  such  frequent  illustration  on  stock 
[and  produce  exchanges,  where  practically  no  money  is  used 
at  all,  and  in  the  real-estate  "booms  "  of  western  towns,  that  it 
need  not  be  dwelt  on  here. 

84.  Credit  of  general  acceptability,  i.e.  credit  money,  acts 
on  prices  very  much  as  would  the  same  amount  of  new  money. 
Such  credit,  it  should  be  noted,  satisfies  within  a  given  country 
a  want  that  cannot  otherwise  be  satisfied  except  with  money 
itself.  It  differs  from  the  check  and  bill  of  exchange  in  that 
any  one  is  willing  to  take  it  in  payment  for  goods  and  services, 
and  it  serves,  therefore,  in  the  pockets  of  the  people  as  a  full 
substitute  for  money  itself.  In  many  countries,  furthermore, 
the  law  makes  it  legal  tender,  or  so-called  "  lawful  money,"  so 
that  the  banks  use  it  as  a  reserve  for  the  security  of  their 
depositors.  Hence  any  arbitrary  increase  in  its  quantity  (i.e. 
any  increase  not  called  for  by  an  increasing  monetary  demand) 
puts  into  the  hands  of  the  people  something  which  they  treat 
exactly  as  they  would  a  corresponding  amount  of  real  money, 
and  the  effect  on  prices  is  the  same. 

For  example,  any  addition  to  the  quantity  of  greenbacks  or 
silver  dollars  in  circulation  in  the  United  States  would  have  an 
immediate  effect  upon  the  value  of  money  and  so  upon  prices. 
At  a  given  time  a  country  needs  only  a  certain  amount  of  money 
to  accomplish  all  of  its  exchanges,  and  prices  seek  adjustment 
to  this  amount.  A  certain  amount  is  needed  as  a  store  of  value 
in  the  banks  and  in  the  pockets  of  the  people,  and  a  certain 
amount  for  the  consummation  of  exchanges.  Credit  money  may 
be  made  to  serve  both  these  purposes.  In  the  United  States 
greenbacks  and  silver  dollars,  although  they  are  credit  instru- 
ments, may  be  lawfully  employed  by  the  banks  as  a  basis  for 
their  credit  operations  ;  hence  any  increase  in  their  quantity 
would  have  as  much  effect  upon  prices  as  a  corresponding 
increase  in  the  quantity  of  gold.  Bank  notes,  when  properly 
issued,  possess  a  great  advantage  over  government  credit  money, 


124  MONEY  AND   CURRENCY 

for  they  are  never  put  forth  except  when  the  demand  for  money 
is  increasing.  Bank  notes  tend  to  keep  prices  from  falling,  but 
do  not  cause  them  to  rise.1 

PRICE  CHANGES  NOT  UNIFORM 

85.  Prices  do  not  change  uniformly.     The  reader  must  not 
suppose  that  the  prices  of  all  goods  ever  rise  or  fall  together. 
The  level  of  prices  is  changed  if  the  price  of  a  single  commodity 
rises  or  falls  while  the  prices  of  others  remain  unchanged.     If 
the  prices  of  some  commodities  rise  while  the  prices  of  others 
fall    to    a    corresponding    degree,   the  level    of   prices   is   not 
changed  at  all.     Prices  are  the  direct  outcome  of  the  contact 
between   goods  and  money  or  credit.     When  there  is  an  in- 
crease in  the  supply  of  money  or  in  the  use  of  credit,  only 
those  goods  are  affected  in  price  which  come  in  contact  with 
the  new  money  or  credit,  for  those  are  the  goods  for  which 
there  is  an  increased  demand. 

86.  Let  us  suppose  that  a  Connecticut  farmer  discovers  in  a 
cave  on  his  farm  the  storied  treasure  of  Captain  Kidd  in  the 
shape  of  5,000,000  ounces  of  gold  (enough  to  coin  $100,000,000). 
What  will  he  do  with  this  gold  ?    He  will  consult  with  some  good 
business  man  whom  he  trusts,  and  will  select  a  dozen  or  more 
banks  in  which  to  deposit  his  treasure.    He  will  build  himself 
a  new  house  and  furnish  it  sumptuously.    Some  of  his  friends 
will  advise  him  to  have  a  home  in  the  city  as  well  as  in  the 
country,  and  he  will  buy  a  house  on  Fifth  Avenue.    He  will 
buy  grand  pianos  and  automobiles  for  his  children  and  fit  them 
out  with  fine  clothing.    The  discovery  of  that  buried  gold  will 
evidently  increase  the  demand  for  various  articles  and  so  tend 
to  raise  their  prices.2 

Meantime  the  banks  are  busy.    While  they  hold  this  money 
they  can  increase  their  loans,  and  some  of  their  customers  are 

1  This  statement  is  not  true  of  national  bank  notes,  which  are  not  issued  under 
scientific  conditions.     The  important  difference  between  bank  notes  and  govern- 
ment credit  money  is  discussed  in  the  chapter  on  credit  money. 

2  In  Sections  86  and  87  the  monetary  isolation  of  the  United  States  is  assumed, 
so  that  none  of  the  new  gold  is  exported. 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES 


125 


enabled  to  make  larger  purchases  of  goods  than  they  could 
have  made  had  not  a  farmer  found  Captain  Kidd's  treasure.  In 
all  probability  the  banks  first  increase  their  call  loans  to  specu- 
lators in  stocks,  wheat,  corn,  cotton,  and  other  produce ;  and 
as  a  result  the  demand  for  stocks  and  other  speculative  com- 
modities is  increased  and  their  prices  tend  upward.  But  the 
farmer  does  not  wish  to  leave  his  money  long  with  the  banks, 
for  they  pay  him  only  2  per  cent  interest  on  it.  So  he  begins 
to  make  investments,  buying  the  stocks  and  bonds  of  railroads. 
The  purchase  of  these  does  not  in  itself  cause  the  employment 
of  any  labor  or  the  purchase  of  any  commodities,  but  what  will 
the  persons  who  have  sold  the  stocks  and  bonds  do  with  the 
money  or  credit  they  receive?  They  have  sold  their  securities 
.in  order  that  they  may  get  money  for  the  purchase  of  some- 
thing else.  The  greater  part  of  that  money  will  go  into  the 
construction  of  new  railroads  or  new  industrial  plants.  Nor 
will  the  banks  be  content  always  to  lend  this  new  money  to 
speculators,  for  the  call  loan  rate  of  interest  is  usually  much 
below  the  commercial  rate  of  discount.  They  will  extend  more 
credit  to  merchants  and  manufacturers,  and  these  men  will 
begin  to  enlarge  their  operations. 

Thus  the  farmer's  gold,  or  the  credit  which  it  secures,  must 
soon  find  its  way  into  the  hands  of  men  who  are  engaged  in 
industry,  who  buy  steel,  iron,  lumber,  etc.,  so  that  before  long 
there  is  an  increased  demand  for  building  materials  and  labor. 
Increased  demand  for  commodities  will  cause  their  prices  to  ad- 
vance almost  immediately.  Increased  demand  for  labor,  as  a 
rule,  is  first  met  by  the  employment  of  additional  men  at  the 
old  rate  of  wages,  so  that  the  people  have  more  money  to  spend, 
and  then  the  retail  stores  feel  the  effect  of  the  farmer's  new 
gold.  Retailers  find  their  sales  increasing  and  enlarge  their 
orders ;  then  wholesalers  and  manufacturers  see  good  times 
ahead.  But  before  the  new  orders  come  in  from  the  retailers 
the  manufacturers  have  already  been  confronted  by  the  neces- 
sity of  paying  higher  prices  for  their  raw  materials  on  account 
of  the  speculation  caused  by  the  farmer's  deposits  in  the 
banks. 


126  MONEY  AND   CURRENCY 

In  time  the  wages  of  labor  in  some  employments  may  have 
to  be  advanced  in  order  to  keep  the  men  content  or  to  secure 
sufficient  help.  Since  the  laborers  are  paying  higher  prices  for 
some  of  the  necessaries  of  life,  they  begin  to  find  their  wages 
less  adequate  than  formerly.  But  rates  of  wages,  despite  the 
efforts  of  trade  unions  to  maintain  a  correspondence,  rarely 
rise  at  once  to  the  same  extent  as  prices ;  employers  refuse  to 
admit  the  necessity  for  an  advance,  and  the  working  classes  are 
themselves  only  vaguely  conscious  of  it,  for  they  do  not  readily 
grasp  the  concept  of  a  cheapening  dollar.  Wages  are  the  last 
thing  to  feel  the  effect  of  an  increase  of  the  money  supply,  for 
not  until  prices  have  risen  is  the  stimulus  given  to  industry 
which  leads  to  an  increase  in  the  demand  for  labor. 

The  prices  of  some  articles  are  fixed  by  custom  and  would 
not  be  changed  at  all  in  the  United  States  by  such  a  compara- 
tively small  addition  to  the  money  supply  as  $100,000,000. 
Such,  for  example,  is  the  price  of  a  city  newspaper,  or  a  quart 
of  milk  in  a  country  village,  or  the  fares  which  travelers  pay 
upon  railroads  or  street  cars.  These  customary  charges  it 
would  require  an  extraordinary  change  in  the  money  supply 
to  affect. 

87.  During  all  these  changes  wrought  by  an  increase  in  the 
money  supply  credit  will  also  have  been  at  work.  In  the  illus- 
tration given  it  was  shown  that  credit  was  called  into  play 
at  once,  for  the  bankers  to  whom  the  money  was  intrusted 
immediately  began  to  make  loans  with  it.  Even  a  slight  rise  of 
prices  would  have  some  effect  upon  the  profits  of  various  pro- 
ducers. Since  many  men  would  find  the  demand  for  their  goods 
increasing,  they  would  be  inclined  to  enlarge  their  operations ; 
consequently  the  banks  would  find  that  the  demand  for  loans 
was  increasing.  Furthermore  confidence  in  the  business  out- 
look would  grow  as  prices  rose,  and  men  would  everywhere 
be  more  willing  than  formerly  to  extend  credit.  Manufacturers 
and  wholesalers  would  be  more  liberal  with  their  old  customers 
and  would  scrutinize  less  suspiciously  the  paper  of  new  cus- 
tomers. As  a  result  the  deposits  and  discounts  of  banks  would 
grow,  credit  would  become  a  more  and  more  important  factor 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES     127 

in  the  purchase  of  goods,  and  the  rise  of  prices  would  tend 
to  be  more  than  proportionate  to  the  increase  of  the  money 
supply.1 

88.  In  a  country  like  the  United  States,  where  business  is 
done  largely  by  the  aid  of  banks,  the  credit  system  being  highly 
developed,  an  increase  of  the  volume  of  money  affects  first  the 
prices  of  stocks  and  bonds,  for  these  are  the  articles  that  are 
bought  by  the  men  into  whose  hands  the  money  naturally  comes 
first.    The  prices  of   such  speculative  commodities  as  wheat, 
cotton,  corn,  steel,  etc.,  are  affected  almost  as  quickly;  not  the 
prices  of  all  at  the  same  time,  but  first  one,  then  another.    If 
there  is  great  speculative  interest  in  wheat  and  little  in  other 
produce,  new  money  and  the  credit  it  supports  may  all  for  a  time 
go  into  the  purchase  of  wheat.    On  the  other  hand,  it  may  all 
go  into  the  stock  market.    After  a  time,  however,  it  will  get 
into  general  circulation  and  affect  the  prices  of  most  commodi- 
ties, influencing  first  wholesale  prices,  then  retail,  and  finally 
rents,  wages,  and  salaries. 

89.  The  downward  course  of  prices  during  a  period  when  the 
supply  of  money  is  not  keeping  pace  with  the  demand,  is  also 
irregular.    Under  modern  conditions  banks  first  feel  the  pinch, 
for  the  people  withdraw  from  them  all  the  currency  they  need. 
As  business  grows  and  the  need  for  currency  to  consummate 
exchanges  at  a  given  level  of  prices  increases,  the  lawful  money 
reserves  of  banks  are  cut  into,  country  banks  reduce  their  bal- 
ances in  New  York  and  other  reserve  centers,  and  the  city 
banks  are  forced  to  call  loans  and  contract  their  credits.  Spec- 
ulative borrowers  suffer  first,  and  a  fall  of  prices  ensues  on  the 
stock  and  produce  exchanges,  for  most  of  the  "  bulls  "  in  those 

1  If  we  suppose  that  the  farmer  found,  instead  of  gold,  a  store  of  iron  and 
copper  worth  $100,000,000  at  the  prices  then  prevailing,  several  interesting  queries 
arise.  What  would  be  the  effect  on  the  prices  of  iron  and  copper,  and  on  the  gen- 
eral level  of  prices  ?  Would  the  prices  of  other  goods  than  iron  and  copper  be 
affected?  Would  there  probably  be  an  expansion  of  credit?  Which  would  be 
the  more  beneficial  to  the  country  (its  commercial  isolation  being  assumed), 
such  a  find  of  iron  and  copper,  or  the  find  of  gold  described  in  the  text  ?  In  con- 
sidering these  questions  let  the  reader  recall  the  conditions  that  led  southern 
planters  to  talk  of  burning  cotton  in  1904. 


128  MONEY  AND   CURRENCY 

markets  trade  with  borrowed  funds.  After  stocks  such  com- 
modities as  wheat,  corn,  cotton,  and  pork,  in  which  there  is 
always  a  large  speculative  interest,  decline  in  price  with  more  or 
less  suddenness.  The  heaviness  of  prices  in  the  great  specula- 
tive markets  invariably  gives  a  chill  to  confidence  in  general 
business  circles,  for  the  depression  is  popularly  interpreted  as 
proof  of  apprehension  among  experts  with  regard  to  the  future 
demand  for  goods.  There  is  always  much  talk  about  overpro- 
duction, and  very  little  or  none  at  all  about  the  real  cause  of 
the  slump.  Certain  manufacturers  find  that  they  can  buy  their 
raw  materials  at  lower  prices  than  formerly,  and  keep  their 
mills  running ;  others  find  difficulty  in  getting  expected  help 
from  the  banks,  and  either  run  their  mills  on  half  time  or  close 
them  altogether.  The  fund  paid  to  workingmen  is  reduced  and 
the  sales  of  retailers  fall  off.  Manufacturers  and  wholesalers, 
as  the  demand  for  their  goods  declines,  are  forced  to  cut  prices, 
and  thus  at  last  the  retailer  is  able  to  bring  his  prices  down  to 
a  level  with  the  means  of  his  customers.  Although  the  total 
fund  paid  to  workingmen  is  at  once  reduced,  the  rates  of  wages 
paid  in  different  occupations  are  not  immediately  affected. 
The  laboring  classes  resist  a  cut  with  all  the  power  of  their 
organizations,  and  their  employers,  hoping  that  the  depression 
of  prices  is  only  temporary,  do  not  see  clearly  that  a  permanent 
readjustment  of  wage  schedules  is  necessary. 

90.  The  process  of  price  readjustment  is  a  slow  and  gradual 
one.  A  study  of  the  course  of  prices  during  the  last  few  years 
(1897-1904),  when  the  general  level  has  been  lifted  some  25 
per  cent  by  a  great  increase  in  the  world's  supply  of  gold,  will 
show  that  some  articles  have  doubled  in  price,  that  others  have 
made  only  a  slight  advance,  and  that  still  others  have  not  changed 
at  all ;  that  wages  in  some  occupations  have  been  advanced, 
and  that  in  others  the  old  rates  are  still  paid.  That  the  process 
was  slow  and  long  delayed  the  reader  will  discover  for  himself, 
if  he  examines  the  statistics  of  gold  production  during  the 
last  twenty-five  years.  The  world's  output  of  gold  steadily 
increased  after  1887,  having  risen  from  $105,000,000  in  that 
year  to  $123,000,000  in  1889  ;  to  $147,000,000  in  1892  and 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES      129 

$181,000,000  in  1894.  Despite  the  great  addition  to  the 
world's  stock  of  gold,  prices  did  not  begin  to  rise  in  the  United 
States  until  I89/.1 

91.  Would  prices  rise  in  proportion  to  the  increase  of  the 
money  supply  ?  This  question,  although  a  matter  of  pure  theory, 
has  caused  considerable  discussion.  If  we  could  assume  that 
the  demand  for  money  would  remain  unchanged,  an  affirmative 
answer  would  be  correct.  With  twice  the  amount  of  money, 
the  proportion  of  credit  transactions  remaining  unchanged,  each 
dollar  would  exchange  for  only  half  as  much  as  before.  But, 
as  we  have  seen,  an  addition  to  the  money  supply  sufficient  to 
raise  prices  appreciably  has  a  stimulating  effect  on  industry 
and  on  the  use  of  credit.  We  cannot  assume,  therefore,  that 
the  demand  or  need  for  money  will  ever  remain  the  same  when 
the  supply  is  increasing. 

But  after  the  adjustment  of  prices  to  the  enlarged  money 
supply  is  complete,  industry  being  no  longer  under  an  artificial 
stimulus,  the  new  level  of  prices  should  almost  exactly  reflect 
the  proportionate  increase  of  the  money  supply.  If,  for  instance, 
the  money  of  a  country  were  increased  50  per  cent  during  a  period 
of  five  years,  and  no  further  changes  were  made  in  the  supply 
for  another  five  years,  the  price  level  at  the  end  of  the  ten  years, 
assuming  that  the  readjustment  of  prices  was  then  complete, 
would  be  50  per  cent  higher  than  it  would  have  been  if  the  sup- 
ply of  money  had  not  been  increased.  According  to  the  terms 
of  this  supposition,  as  the  reader  will  notice,  any  changes  in  the 
use  of  credit,  in  money's  rapidity  of  circulation,  in  population, 
or  in  the  production  of  wealth  would  not  affect  the  conclusion  ; 
for  we  do  not  conclude  that  prices  would  rise  50  per  cent,  but 
that  they  would  be  50  per  cent  higher  than  they  would  have 
been  if  the  money  supply  had  not  been  increased. 

1As  regards  the  increase  —  practically  the  doubling  —  of  the  output  of  gold 
after  1883,  it  is  quite  certain  that  no  effect  on  prices  has  been  felt  from  it  to  this 
day  [1896].  Such  things  as  these  must  not  awaken  doubts  in  our  minds  as  to 
the  correctness  of  the  theory  which  declares  that  money  is  an  ordinary  article  of 
merchandise,  the  value  of  which  is  determined  by  the  same  causes  as  those  which 
determine  the  value  of  all  commodities.  —  Pierson's  Economics^  Vol.  I,  p.  390 
(Wotzel's  translation). 


130 


MONEY  AND  CURRENCY 


Professor  Kinley  argues  that  an  increase  of  money  cannot 
have  a  proportionate  effect  on  prices  because  the  first  upward 
tilt  of  prices  would  bring  more  goods  into  market  and  so  increase 
the  demand  for  money ; l  while  a  fall  of  prices  caused  by  a 
reduction  of  the  money  supply  would  lessen  the  volume  of 
goods  offered  and  so  lessen  the  demand  for  money,  so  that 
the  value  of  money  would  not  rise  "  in  proportion  to  the  dimi- 
nution in  its  quantity."  Professor  Kinley,  it  seems,  is  here 
treating  a  temporary  condition  as  if  it  were  permanent.  The 
interaction  of  demand  and  supply  will  undoubtedly  for  a  time 
retard  the  influence  of  changes  in  the  supply  of  money,  but 
only  for  a  time.  If  more  goods  are  brought  forward  at  the  first 
upward  tilt  of  prices,  there  will  be  less  to  be  sold  later  on,  so 
that  in  the  course  of  a  year,  or  during  what  may  be  called  the 
economic  life  of  commodities,  —  a  few  days  in  the  case  of  fruits 
and  other  perishables,  a  season  for  modish  articles,  —  the  aver- 
age demand  for  money  will  not  have  been  affected.  Only  in  so 
far  as  goods  are  brought  forward  which  would  otherwise  never 
have  been  offered,  would  the  demand  for  money  be  really  in- 
creased, and  goods  of  that  character  are  a  negligible  quantity. 

MALADJUSTMENT  OF  PRICES 

92.  When  the  money  of  a  country  is  such  that  .its  supply  is 
subject  to  changes  not  corresponding  to  changes  in  the  demand, 
there  is  never  perfect  adjustment  between  prices  and  general 
values.  We  have  seen  that  changes  in  the  supply  of  money  do 
not  immediately  affect  the  exchange  relations  of  all  goods  to 
money.  The  level  of  prices  is  agitated,  rising  here  and  there  like 
a  crop  of  oats  in  a  field  that  has  been  unevenly  fertilized,  and 
considerable  time  must  elapse  before  a  new  level  of  prices,  put- 
ting commodities  into  the  same  exchange  relations  which  they 
held  under  the  old,  is  established.  During  this  transitional 
period  there  exists  what  may  be  called  a  maladjustment  of  prices 
to  values,  the  exchange  relations  of  commodities  being  disturbed 
by  conditions  not  primarily  affecting  their  demand  or  supply. 

1  Money,  pp.  158-160. 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES 

So  subtle  and  gradual  is  the  transition  that  business  men  as  a 
rule  give  no  thought  to  it  and  do  not  see  its  significance,  so 
that  they  are  unaware  when  they  sell  goods  at  the  old  prices 
that  the  money  or  credit  they  receive  represents  less  or  greater 
value  than  before. 

This  maladjustment  of  prices  is  a  matter  of  great  consequence, 
for  the  world's  supply  of  gold  and  silver,  the  metals  which  most 
civilized  nations  are  freely  coining  into  money,  is  constantly 
increasing  at  a  rate  never  corresponding  with  the  increase  in 
the  monetary  demand.  Never,  therefore,  is  there  perfect  adjust- 
ment between  prices  and  values,  such  as  would  prevail  if  the 
money  demand  and  supply  were  constant  ;  and  sometimes  the 
maladjustment  is  so  great  as  to  exert  a  powerful  influence  upon 
all  industry,  diverting  capital  into  channels  into  which  it  would 
not  otherwise  flow,  and  bringing  unexpected,  if  not  undeserved, 
gains  or  losses  to  many  entrepreneurs. 

93.  The  world's  experience  has  furnished  many  illustrations 
of  the  effect  upon  prices  of  changes  in  the  supply  of  money.  In 
the  sixteenth  and  seventeenth  centuries,  as  a  result  of  the  influx 
of  gold  and  silver  from  America,  prices  in  Europe  rose  between 
200  and  300  per  cent.1  Spain  was  most  successful  in  the  search 
for  the  precious  metals,  and  it  was  in  that  country  that  prices 
first  felt  the  stimulus  of  the  new  supplies.  In  those  days  credit, 
especially  international  credit,  was  but  little  developed,  and  the 
important  markets  of  Europe,  on  account  of  the  difficulties  of 
communication  and  transportation,  were  not  in  such  close  touch 
as  now,  so  that  the  new  gold  and  silver  flowed  sluggishly  from 
country  to  country  throughout  Europe  and  into  the  Orient. 

1  Adam  Smith  wrote  as  follows  concerning  the  change  in  prices  during  this 
period  :  "  From  about  1570  to  about  1640,  during  a  period  of  about  seventy  years, 
silver  sunk  in  its  real  value,  or  would  exchange  for  a  smaller  quantity  of  labor 
than  before;  and  corn  rose  in  its  nominal  price,  and  instead  of  being. commonly 
sold  for  about  two  ounces  of  silver  the  quarter,  or  about  ten  shillings  of  our  pres- 
ent money,  came  to  be  sold  for  six  and  eight  ounces  of  silver  the  quarter,  or  about 
thirty  and  forty  shillings  of  our  present  money.  The  discovery  of  the  abundant 
mines  of  America  seems  to  have  been  the  sole  cause  of  this  diminution  in  the 
value  of  silver  in  proportion  to  that  of  corn.  It  is  accounted  for  accordingly  by 
everybody  ;  and  there  never  has  been  any  dispute  about  the  fact,  or  about  the 
cause  of  it."  —  Wealth  of  Nations,  Book  I,  chap,  xi,  pt.  iii. 


132  MONEY  AND   CURRENCY 

Nevertheless  gradually  the  new  supplies  of  the  precious  metals 
were  apportioned  among  the  different  nations  in  accordance 
with  the  needs  of  each. 

The  period  between  1810  and  1850  exhibits  in  striking  man- 
ner the  effect  on  prices  of  a  failure  of  the  supply  of  money 
(gold  and  silver)  to  increase  at  equal  pace  with  the  demand. 
During  these  forty  years  the  world's  output  of  the  precious 
metals  averaged  only  about  $36,000,000  per  annum.  It  is 
doubtful  if  the  yearly  addition  to  the  world's  supply  was  suffi- 
cient to  meet  the  demand  for  the  precious  metals  in  the  arts 
and  to  compensate  for  the  abrasion  and  hoarding  of  coins. 
Whether  the  supply  of  gold  and  silver  available  for  monetary 
use  decreased  or  not,  it  is  certain  that  the  growing  monetary 
demand  for  them  was  not  met  by  a  growing  supply,  for  during 
the  period  their  value  doubled,  prices  falling  some  50  per  cent.1 

After  1850  new  gold  from  California  and  Australia  gave 
prices  an  upward  turn.  Between  1820  and  1830  the  world's 
production  of  gold  had  amounted  to  less  than  $10,000,000  per 
annum  ;  between  1830  and  1840,  to  about  $13,000,000;  between 
1840  and  1850,  to  $36,000,000.  The  annual  output  of  silver 
during  these  years  averaged  about  $25,000,000.  After  1850 
there  was  very  little  increase  in  the  output  of  silver,  but  that 
of  gold  rose  to  an  annual  average  of  $133,000,000  for  the 
decade  ending  1860.  During  that  decade  the  addition  to  the 
world's  stock  of  precious  metals  amounted  to  $1,704,000,000, 
of  which  only  $73,000,000  was  silver.  The  addition  of  this 
new  money  to  the  world's  supply,  a  quantity  greater  by  $150,- 
000,000  than  had  been  added  during  the  preceding  forty  years, 
had  an  immediate  effect  on  prices  in  the  United  States  and 
Europe,  although  the  effect  was  not  so  great  as  it  would  have 
been  had  not  India  and  the  Orient  eagerly  absorbed  large  quan- 
tities of  European  silver.  The  new  gold  first  acted  on  prices 
through  an  expansion  of  credit.  The  gold  discoveries  were 
the  sensation  of  the  time ;  men's  imaginations  were  fired  and 
their  hopes  lifted.  In  1850  and  1851  prices  jumped  fully  17  per 

1  Jevons  estimated  the  fall  of  prices  between  1809  and  1849  at  59  per  cent ; 
Sauerbeck,  at  45  per  cent. 


RELATION  OF  MONEY  AND  CREDIT  TO  PRICES 


133 


cent.  The  upward  movement  culminated  in  1857,  when  prices, 
according  to  Falkner's  index  number,  were  some  23  per  cent 
above  those  of  1849.  ^n  Europe  the  upward  turn  of  prices  was 
less  marked  in  1850  and  1851  than  in  the  United  States,  but 
the  total  advance  between  1849  and  l857  was  about  the  same  on 
both  continents.1  The  panic  of  1857,  being  attended  by  a  con- 
traction of  credit,2  caused  a  sudden  slump  in  price,  averaging 
in  Europe  and  the  United  States  about  10  per  cent. 

During  the  next  twenty  years  the  causes  affecting  general 
prices  were  complicated  in  this  country  by  the  issue  of  irre- 
deemable greenbacks,  but  in  countries  using  gold  or  silver  as 
money  prices  rose  slowly  after  1857  and  reached  their  next 
high  level  just  before  the  panic  of  1873,  when  the  price  level 
was  slightly  above  that  of  1857.  The  production  of  precious 
metals  continued  on  a  large  scale  after  1860,  the  average  out- 
put of  gold  for  the  next  thirteen  years  being  $125,000,000  and 
of  silver  $58,000,000.  This  new  gold  and  silver  would  doubt- 
less have  had  a  much  greater  effect  on  the  value  of  gold,  and 
therefore  on  prices,  had  not  credit  been  continuously  stifled 
during  this  period  by  the  smoke  of  battlefields  in  Europe  and 
the  United  States.  War,  since  it  takes  men  from  the  farms 
and  shops,  reduces  the  need  for  currency  as  a  medium  of  ex- 
change, but  this  diminution  in  the  demand  for  money  is  usually 
offset  by  the  tendency  of  men  at  such  a  time  to  hoard  gold  and 
silver,  and  of  banks  to  increase  their  reserves. 

Prices  in  the  United  States  from  1861  to  1879  did  not 
reflect  changes  in  the  value  of  gold  or  silver,  for  during  that 
period  the  money  of  the  country  was  inconvertible  credit 
money,  the  so-called  "greenback."  Prices  rose  as  the  value 
of  the  greenback  fell,  and  vice  versa.  The  forces  governing 
the  value  of  the  greenback  at  this  time  will  be  discussed  in 
Chapter  XIII. 


1  Between  1849  and  1%S7  tne  index  number  of  Jevons  rose  from  64  -to  85,  or 
32  per  cent;  Sauerbeck's  number,  from  74  to  105,  or  42  per  cent;  Soetbeer's  num- 
ber, from  83.8  to  107.7,  or  28  per  cent. 

2  The  loans  of  the  New  York  banks  shrank  from  $122,000,000  in  August  to 
$95,000,000  in  October.    See  Sumner's  History  of  American  Currency,  p.  182. 


134  MONEY  AND   CURRENCY 

The  reader  must  not  expect  to  find  in  the  facts  of  experience 
full  confirmation  of  any  theoretic  analysis  of  principles  depend- 
ent upon  human  wants  and  passions.  Just  as  the  physicist, 
because  of  interfering  forces  beyond  his  control,  can  point  to 
no  phenomenon  affording  a  perfect  illustration  of  the  law  of 
gravitation  or  of  the  laws  of  motion  in  unimpeded  operation, 
so  the  economist  is  unable  to  find  in  the  business  world  facts 
that  prove  beyond  cavil  a  single  one  of  his  propositions.  Facts 
demonstrate  nothing.  As  Emerson  said,  "Every  man  has  facts 
enough ;  what  is  wanted  is  the  heat  that  dissolves  facts." 
A  sound  theory  is  one  that  explains  the  facts  by  disclosing  the 
relations  of  cause  and  effect ;  in  so  far  as  a  theory  fails  to  do 
that,  it  is  unsound  or  incomplete. 

LITERATURE 

MILL,  Political  Economy,  Book  III,  chaps,  viii,  xii,  xxii ;  L.  L.  PRICE, 
Money  and  its  Relation  to  Prices  (London,  1896)  ;  ELIJAH  HELM,  The 
Joint  Standard  (London,  1894)  ;  J.  E.  CAIRNES,  "  Essays  on  the  Gold 
Question"  contained  in  Essays  in  Political  Economy  ;  JEVONS,  Investiga- 
tions in  Currency  and  Finance,  pp.  13-159;  ADAM  SMITH,  Wealth  of 
Nations,  chap,  xi ;  SCHOENHOF,  History  of  Money  and  Prices,  —  presents 
views  opposed  to  those  in  this  chapter ;  TOOKE  and  NEWMARCH,  History 
of  Prices ;  C.  M.  WALSH,  Measurement  of  General  Exchange  Value 
(New  York,  1901)  ;  and  Fundamental  Problem  in  Monetary  Science; 
NICHOLSON,  Money  and  Monetary  Problems ;  essay  on  the  "  Causes  of 
Movements  in  General  Prices " ;  DAVID  A.  WELLS,  Recent  Economic 
Changes. 


CHAPTER  VII 

THE  RELATION  OF  MONEY  AND   CREDIT  TO  THE 
RATE  OF  INTEREST 

94.  Capital  and  the  rate  of  interest  as  defined  by  the  economist  and  by  the 
practical  man.  95.  The  rate  of  interest  is  determined  by  the  demand  for  and 
supply  of  capital.  96.  The  lending  power  of  banks  varies  with  the  savings  of 
the  people,  so  that  the  bank  rate  of  discount  and  the  rate  of  interest  are  fixed 
by  the  same  forces.  97.  Why  the  capital  fund  of  a  country  corresponds  in  value 
with  the  capital  goods,  although  the  fund  is  derived  from  consumers'  goods  as 
well  as  from  capital  goods.  98.  The  demand  for  capital  is  not  a  demand  for 
'money  ;  yet  an  increasing  demand  for  capital  is  usually  accompanied  by  an  expan- 
sion of  credit  and  an  upward  tendency  of  prices.  99.  Except  during  a  period  of 
price  readjustment  the  supply  of  money  has  no  relation  to  the  rate  of  interest. 
100.  A  temporary  increase  of  the  money  supply  tends  to  lower  the  rate  of  interest, 
and  a  temporary  decrease  tends  to  cause  it  to  rise.  101.  A  steady  or  continuous 
increase  or  decrease  in  the  money  supply  perpetuates  a  maladjustment  of  prices 
and  exerts  a  constant  influence  upon  the  rate  of  interest ;  a  steady  increase  tends 
to  keep  the  rate  of  interest  above  the  normal.  102.  Sooner  or  later  the  stimulus 
given  to  industry  by  rising  prices  leads  to  speculation  and  panic.  103.  When  the 
money  supply  fails  to  increase  as  fast  as  the  demand,  the  rate  of  interest  tends  to 
decline.  104.  The  decline  of  profits  and  the  falling  off  in  the  demand  for  capital 
are  wrongly  attributed  as  a  rule  to  overproduction.  105.  Changes  in  the  rate  of 
interest  in  the  London  money  market  during  the  nineteenth  century.  106.  Why 
bank  reserves  are  large  during  a  period  of  decreasing  money  supply.  107.  A 
maladjustment  of  prices  makes  the  commodity  rate  of  interest  differ  from  the 
money  rate. 

94.  The  rate  of  interest,  according  to  economists,  is  the 
percentage  which  the  borrower  pays  the  lender  for  the  use 
of  his  capital.  By  capital  economists  mean  all  those  goods, 
or  kinds  of  wealth,  which  people  produce  in  excess  of  their 
immediate  needs,  and  which  are  saved  for  use  in  the  produc- 
tion of  additional  wealth.  This  wealth  they  usually  divide  into 
three  classes,  as  follows:  (i)  tools  and  machinery,  (2)  mate- 
rials, (3)  means  of  subsistence. 

The  man  of  business  uses  "  capital "  in  a  different  sense. 
To  him  it  means  all  the  money  and  credit  that  are  available  for 
business  uses  ;  and  the  rate  of  interest  is  the  percentage  of 

135 


136  MONEY  AND   CURRENCY 

money  which  the  borrower  gives  to  a  lender  for  the  use  of  his 
capital,  or  money. 

We  shall  show  in  this  chapter  that  the  economist  and  the 
practical  man  have  really  in  mind  the  same  thing  when  they 
speak  either  of  capital  or  of  the  rate  of  interest ;  and  shall  then 
consider  the  extent  to  which  capital1  and  the  rate  of  interest 
are  dependent  upon  the  supply  of  money  and  the  use  of  credit. 

If  a  man  wishes  to  make  shoes,  it  is  clear  that  he  must  have 
leather  and  the  necessary  tools,  and  also  enough  food  to  sup- 
port him  until  the  shoes  are  finished  and  sold ;  and  if  he  does 
not  own  these  things,  and  has  no  money  with  which  to  buy 
them,  he  must  borrow.  Among  a  people  not  using  money  he 
would  be  obliged  to  borrow  the  goods  themselves,  and  might 
have  great  difficulty  in  doing  this,  for  the  men  who  owned  the 
goods  he  wanted,  although  they  might  be  willing  to  exchange 
them  for  other  things,  might  not  be  willing  to  lend  them. 
Money  removes  the  necessity  for  such  clumsy  barter  between 
the  borrower  and  the  lender.  Men  who  have  goods  they  do  not 
wish  to  use,  sell  them  for  money,  either  cash  in  hand  or  credit, 
and  then  either  buy  other  things  or  deposit  the  money  and 
credit  in  banks.  And  men  like  our  shoemaker,  who  want  tools, 
raw  materials,  and  other  capital  goods,  first  borrow  money  and 
credit  from  the  banks  and  therewith  buy  the  things  they  need. 
Since  money  is  the  thing  loaned,  the  rate  of  interest  is  always 
figured  in  money,  the  borrower  agreeing  to  repay  the  principal 
plus  a  sum  of  money  equal  to  a  certain  percentage  of  it.  For 
this  reason  men  are  apt  to  think  that  the  rate  of  interest  is  in 
the  main  dependent  on  the  supply  of  money.  This  view  of  the 
matter  is  superficial. 

1  In  this  book  the  word  "capital "  is  employed  in  the  sense  given  it  by  the  econo- 
mist ;  the  business  man's  idea  of  capital  is  expressed  by  such  phrases  as  "  capital 
funds  "  or  "loanable  funds."  Recent  discussions  of  the  subject  reveal  a  tend- 
ency on  the  part  of  economists  to  adopt  the  business  usage,  and  to  make  a  dis- 
tinction between  abstract  capital  —  money  and  credit  available  for  use  in  business 
—  and  concrete  capital,  which  is  often  described  as  "capital  goods,"  or  "pro- 
ducers' goods."  Although  inclined  to  favor  the  business  usage,  I  adopt  the  econo- 
mists' in  this  book  lest  the  reader  be  confused  should  he  pursue  his  study  in  the 
classical  literature  of  the  subject.  However  we  define  the  terms,  the  ideas  under- 
lying them  can  be  clearly  set  forth,  and  that,  of  course,  is  the  important  thing. 


THE  RATE  OF  INTEREST 


137 


95.  The  rate  of  interest  is  determined  by  the  demand  for 
and  supply  of  loanable  capital.  Notwithstanding  the  fact  that 
at  the  present  time  money  is  the  thing  always  borrowed,  the 
rate  of  interest  does  not  primarily  depend  on  the  abundance  or 
scarcity  of  money  or  upon  the  demand  for  it.  It  depends  upon 
the  abundance  of  capital  in  the  possession  of  people  who  do  not 
wish  to  utilize  it,  and  upon  the  demand  for  it ;  in  other  words, 
upon  the  quantity  of  wealth  which  people  have  produced  in 
excess  of  their  own  needs,  and  upon  the  demand  for  it  from 
men  who  wish  to  put  it  to  productive  uses. 

The  demand  for  capital  comes  from  men  who  see  opportuni- 
ties to  make  profit  in  business,  and  who  have  not  capital  enough 
of  their  own  to  carry  out  their  plans.  A  man,  for  example, 
thinks  he  sees  large  profits  in  the  manufacture  of  a  pump  he 
has  invented.  His  own  savings  amount  to  $10,000,  but  he 
finds  that  if  he  had  $20,000  he  could  put  up  a  larger  plant  and 
make  bigger  profits  than  if  he  employed  only  his  own  capital. 
Therefore  he  tries  to  borrow  $10,000.  The  maximum  rate  of 
interest  he  is  willing  to  pay  depends  altogether  upon  the  rate 
of  profit  he  expects  to  make.  If  he  feels  certain  that  he  can 
make  20  per  cent,  he  may  be  willing  to  pay  10  or  15  per  cent 
for  borrowed  capital  rather  than  not  have  the  use  of  it. 

The  supply  of  loanable  capital  comes  from  men  who  have 
wealth  that  they  do  not  wish  to  employ  productively,  but  from 
which  they  wish  some  return,  preferring  to  forego  the  imme- 
diate consumption  of  it  in  order  that  they  may  have  a  larger 
amount  for  use  in  the  future. 

Just  as  the  value  of  a  commodity  is  determined  by  what  is 
called  its  marginal  or  final  utility,  so  the  rate  of  interest  is 
fixed  by  the  marginal  productivity  of  capital.  The  demand  for 
capital  is  not  the  same  with  different  borrowers.  One  man 
might  be  willing  and  able  to  pay  10  per  cent,  whereas  another 
would  see  no  hope  of  profit  if  he  paid  over  6  per  cent,  and 
still  another  might  not  be  able  to  pay  over  4  per  cent.  The 
demand  for  capital,  therefore,  will  increase  as  the  rate  of 
interest  is  lowered,  and  will  diminish  as  the  rate  of  interest  is 
raised.  In  the  same  way  the  amount  of  capital  that  will  be 


138  MONEY  AND   CURRENCY 

offered  will  tend  to  increase  as  the  rate  of  interest  rises,  and 
tend  to  decrease  as  the  rate  of  interest  falls.  Some  men  will 
live  economically  and  save  as  much  as  possible  if  they  can  lend 
at  10  per  cent,  who  would  not  save  at  all  if  only  2  per  cent 
were  offered.  If  in  a  country  at  a  given  time  there  is  a  bor- 
rowing demand  for  $100,000,000  of  capital  offered  at  6  per 
cent,  that  would  be  the  rate  of  interest  provided  there  is  not 
more  than  $100,000,000  of  capital  offered  at  6  per  cent.  If 
the  supply  of  capital  is  in  excess  of  that  sum,  then  some  of  the 
lenders,  fearing  they  may  not  find  a  borrower,  will  offer  loans 
at  less  than  6  per  cent,  say  at  5^  per  cent.  The  rate  always 
tends  toward  that  figure  which  establishes  an  equilibrium 
between  the  demand  and  supply. 

ORIGIN  OF  LOANABLE  FUNDS 

96.  The  lending  power  of  banks  varies  with  the  savings  of 
the  people,  so  that  the  bank  rate  of  discount  is  fixed  by  the 
same  forces  which  fix  the  rate  of  interest.  The  average  bor- 
rower always  thinks  of  his  wants  in  terms  of  money.  A  manu- 
facturer who  wishes  to  expand  his  business  needs  more  capital, 
but  always  thinks  of  his  need  as  being  for  money  or  credit. 
He  consults  the  financial  page  of  a  newspaper  and  it  tells  him 
that  money  is  "tight,"  that  the  rate  of  discount  is  correspond- 
ingly high,  and  that  the  banks  are  unable  to  expand  their  loans. 
His  ability  to  borrow  seems  to  him,  and  to  the  banker  from 
whom  he  wishes  to  borrow,  to  depend  altogether  upon  the  sup- 
ply of  money  in  the  community.  If  "money"  is  plentiful,  the 
rate  of  interest  is  low ;  if  it  is  scarce,  the  rate  of  interest  is 
high.  So  business  men  and  bankers  usually  think  of  the  rate 
of  interest  as  being  determined  altogether  by  the  money  situa- 
tion, and  often  assume  that  a  high  rate  indicates  a  need  of 
more  money  and  that  a  low  rate  is  due  to  a  plethora  of  money. 
We  have  here  a  confusion  of  money  with  capital  which  it  is 
necessary  to  clear  away,  for  it  has  led  to  mischievous  legisla- 
tion in  the  past  and  is  to-day  the  basis  of  worthless  remedies 
proposed  for  the  relief  of  the  money  market. 


THE  RATE  OF  INTEREST  139 

The  loanable  funds  in  the  possession  of  banks  are  derived 
from  and  are  representative  of  the  loanable  capital  in  a  country. 
When  the  amount  of  loanable  capital  increases  the  amount  of 
loanable  funds  increases  in  a  corresponding  degree.  Banks 
create  nothing;  all  their  lending  power  is  the  product  of  indus- 
try. Among  a  people  who  produce  little  wealth  and  save  none 
a  bank  could  not  exist,  for  it  would  receive  no  deposits  and 
could  make  no  loans.  Every  deposit  of  money  or  credit  in  a 
bank  represents  actual  wealth  or  capital  that  has  been  saved  in 
the  community.  In  a  country  like  the  United  States,  where 
practically  all  lending  is  done  by  banks,  and  where  the  sav- 
ings of  the  people  are  deposited  in  them,  their  power  to  lend 
varies  with  those  savings.  When  a  farmer  at  the  end  of  a 
season  finds  that  after  paying  all  expenses  he  has  left  ten 
tons  of  hay  for  which  he  has  no  use,  he  can  be  said  to  have 
saved  ten  tons  of  hay.  In  an  age  of  barter  he  might  have  used 
that  hay  as  capital  and  enlarged  his  herd  of  cattle,  or  he  might 
have  loaned  it  to  a  neighbor  on  condition  that  he  should  be 
repaid  eleven  tons  a  year  later,  or  he  could  have  exchanged  the 
hay  for  other  goods.  Under  the  modern  money  regime  he  can 
do  any  one  of  these  things  with  his  hay,  but  in  a  much  easier 
way.  He  may  either  use  it  himself  or  sell  it  for  money  or 
credit,  say  $100,  and  then  either  spend  the  $100  or  lend  it. 
That  $100  represents  the  ten  tons  of  hay  for  which  he  had  no 
use ;  it  constitutes  a  "  loanable  fund  "  derived  from  the  con- 
crete capital,  hay.  If  we  could  trace  back  to  their  origin  the 
$10,000,000,000  of  bank  deposits  in  the  United  States,  we 
should  find  that  all  had  their  source  in  concrete  products 
of  labor  for  which  the  owners  had  no  immediate  use.  This 
statement  applies  to  both  classes  of  deposits  described  in 
Chapter  III.  The  cash  deposit  represents  goods  which  the 
depositor  has  parted  with  ;  the  credit  or  loan  deposit  repre- 
sents goods  which  the  depositor  (who  is  a  borrower)  is  about 
to  acquire,  and  becomes  the  basis  for  a  cash  deposit  in  the 
hands  of  the  man  from  whom  the  goods  are  bought.  The 
concrete  goods  not  immediately  wanted  by  the  owners  con- 
stitute the  country's  loanable  capital ;  the  money  and  credit 


140  MONEY  AND   CURRENCY 

for  which  these  goods  are  exchanged  constitute  the  loanable 
funds  of  banks. 

97.  It  should  be  noted  that  the  capital  fund  of  a  country 
arises  not  only  from  the  sale  of  capital  goods  but  also  from 
the  sale  of  goods  that  are  ready  for  consumption,  which  are 
called  " consumers'  goods."  For  example,  a  manufacturer  of 
shoes,  which  are  consumers'  goods,  is  quite  as  likely  to  deposit 
his  profits  in  a  bank  or  to  use  them  in  the  enlargement  of  his 
own  business  as  is  the  manufacturer  of  plows,  which  are  capi- 
tal goods.  How,  then,  can  there  be  any  necessary  correspond- 
ence between  the  amount  of  capital  goods  and  the  fund  which 
the  business  man  views  as  capital  ?  The  size  of  the  fund 
available  for  business  use  evidently  varies,  other  things  the 
same,  with  the  rate  of  interest  offered  by  the  entrepreneur;  a 
high  rate  will  tempt  people  to  save  and  lend  part  of  their 
income  who  would  not  save  at  all  if  a  low  rate  were  offered. 
Hence  the  capital  fund  swells  as  the  interest  rate  rises  and 
contracts  as  the  interest  rate  declines. 

If  for  any  reason,  such  as  a  rise  in  the  rate  of  interest 
caused  by  a  war,  a  people  become  more  parsimonious  and  the 
capital  fund  of  a  country  suddenly  increases,  at  once  there  is 
a  stronger  demand  for  capital  goods  and  their  prices  rise,  while 
the  prices  of  certain  consumers'  goods  weaken,  for  people  are 
buying  less  of  comforts  and  luxuries.  This  change  in  prices 
will  lead  to  an  increased  production  of  capital  goods  and  to  a 
reduction  in  the  output  of  consumers'  goods.  Thus  there  is  a 
constant  correspondence  or  relationship  between  capital  goods 
and  capital  fund,  between  the  capital  of  the  economist  and  the 
capital  of  the  practical  man. 

The  following  diagram  may  help  the  reader.  Let  circle  I 
represent  the  country's  new  wealth  at  any  moment ;  it  is 
divided  into  (a)  consumers'  goods,  that  is,  goods  capable  of 
immediately  satisfying  desire ;  and  (b)  capital  goods,  which  can- 
not immediately  satisfy  wants  and  have  value  only  because  they 
are  aids  to  the  production  of  consumers'  goods. 

Let  circle  II  represent  the  fund  of  money  and  credit  for 
which  all  the  goods  in  circle  I  are  exchanged.  This  fund  will 


THE   RATE  OF   INTEREST 


141 


also  be  divided  into  two  purts  :  (a1)  ibc  money  and  credit  spent 
in  the  purchase  of  the  necessaries  and  comforts  of  life,  that  is, 
on  direct  satisfactions;  (b1)  that  spent  in  the  purchase  of  capital 
goods,  that  is,  in  business  or  in  the  production  of  more  wealth. 
The  two  funds  (af)  and  (b')  in  circle  II  are  separated  by  a 
wave  line  to  indicate  the  fact  that  they  are  easily  expanded  or 
contracted.  Present  and  future  wants  are  competing  for  the 
total  fund ;  the  business  man  or  entrepreneur  represents  future 
wants,  and  the  more  he  bids  in  the  way  of  interest,  the  more 
he  gets.  On  the  other  hand,  the  two  classes  of  goods  (a)  and 
(b)  in  circle  I,  being  comparatively  fixed  in  quantity  at  any 
given  time,  are  separated  by  a  straight  line  ;  yet  the  size  of 


A  COUNTRY'S  NEW  WEALTH 


THE  MONEY  AND  CREDIT  FOR  WHICH 
THE  NEW  WEALTH  IS  EXCHANGED 


DIAGRAM  IV 


each  class  of  these  is  in  some  degree  capable  of  immediate 
expansion  and  contraction,  for  there  are  many  goods  which 
lend  themselves  to  either  productive  or  unproductive  uses.  A 
family  horse,  for  instance,  is  a  consumer's  good  ;  yet  a  rise  in 
the  price  of  horses  may  cause  its  sale  to  an  expressman  and  so 
make  it  a  capital  good. 

It  is  evident  that  the  origin  of  the  fund  (b1)  in  the  second 
circle  is  not  exclusively  in  (b}  of  the  first  circle ;  the  capital 
fund  (b')  comes  from  all  classes  of  people,  from  those  pro- 
ducing luxuries  as  well  as  from  those  producing  capital  goods. 
Nevertheless  the  values  of  (b}  and  (b1)  will  always  pretty  closely 
correspond,  and  any  sudden  increase  in  (b')  will  lead  to  a  corre- 
sponding though  gradual  increase  in  the  quantity  of  goods  in 


142  MONEY  AND   CURRENCY 

(b) ;  for  the  resultant  increase  in  the  demand  for  capital  goods 
will  raise  their  value  and  so  lead  to  an  increase  in  their  volume 
through  increased  production  and  through  the  conversion  of 
consumers'  goods  into  capital  goods. 

Capital,  then,  as  distinct  from  capital  goods,  may  be  defined 
as  that  fund  of  money  and  credit  which  at  any  time  is  available 
for  use  in  business.1 

It  is  clear,  therefore,  that  the  bank  rate  of  discount  —  the 
rate  charged  by  banks  for  the  use  of  their  money  and  credit 
—  must  correspond  with  the  rate  of  interest  upon  capital. 
The  loanable  capital  and  the  loanable  funds  of  a  country  are 
practically  the  same  thing :  the  one  a  heterogeneous  mass  of 
value  in  the  form  of  various  goods;  the  other  the  same  mass 
of  value  made  homogeneous  by  the  universal  solvent,  money. 
The  bank  rate  of  discount,  since  it  is  determined  by  the  de- 
mand for  and  supply  of  loanable  funds,  is  governed  by  the  same 
forces  which  fix  the  rate  of  interest  on  capital.  The  fact 
that  banks  make  a  practice  of  deducting  the  interest  from  the 
principal  at  the  time  a  loan  is  made,  tends  to  keep  the  dis- 
count rate  a  fraction  lower  than  it  would  be  if  the  interest 
were  computed  on  the  present  worth  of  the  loan,  but  that  dif- 
ference is  a  mere  matter  of  arithmetic  and  does  not  alter  the 
significance  of  the  rate  of  discount. 

98.  A  demand  for  capital  is  not  a  demand  for  money.  This 
is  a  proposition  of  much  practical  importance.  The  demand 
for  money  comes  from  people  who  have  something  to  sell ;  it 
tends  to  vary  with  the  volume  of  exchanges.  The  demand  for 
capital  comes  from  men  who  want  to  borrow  something,  and 
who  want  to  get  possession  of  the  tools  and  raw  materials  of 
industry  ;  it  does  not  necessarily  have  any  effect  on  the  volume 
of  exchanges.  The  demand  for  money  yields  price  ;  the  demand 
for  capital  yields  the  rate  of  interest. 

1  The  reader  who  wishes  to  examine  other  discussions  of  this  rather  abstruse 
subject  should  consult  Seager's  Economics,  Fetter's  Economics,  Veblen's  Theory 
of  Business  Enterprise,  Bohm-Bawerk's  Capital,  and  Irving  Fisher's  article  on 
"  Precedents  for  defining  Capital "  in  Quarterly  Journal  of  Economics  for  May, 
1904. 


THE  RATE  OF   INTEREST 

But  does  not  the  man  who  wants  more  capital,  who  wants  a 
larger  plant  than  he  can  buy  with  his  own  wealth,  —  does  not 
he  go  into  the  market  after  money,  or  at  least  after  its  repre- 
sentative, credit  ?  He  certainly  does.  And  that  is  the  reason 
why  a  man  who  borrows  capital  is  usually  spoken  of  as  a  bor- 
rower of  money.  But  his  demand  for  capital,  it  should  be  noted, 
makes  no  difference  in  the  relation  between  the  volume  of 
exchanges  and  the  money  supply.  At  a  given  time  in  a  com- 
munity there  is  a  certain  amount  of  money  by  means  of  which, 
with  the  aid  of  credit,  these  exchanges  will  be  effected.  Let  us 
suppose  that  in  a  community  the  demand  for  capital  is  such 
that  the  rate  of  interest  is  5  per  cent  and  that  certain  men 
decide  to  build  a  railroad  and  borrow  a  large  amount  of  the 
necessary  capital,  increasing  thereby  the  demand  for  capital  so 
that  the  rate  of  interest  rises  to  6  per  cent.  Has  the  demand 
for  money  been  increased  ?  Not  at  all.  There  has  been  no  in- 
crease in  the  amount  of  wealth  to  be  exchanged,  and  no  increase 
in  the  volume  of  exchanges.  The  increased  demand  for  "money" 
has  raised  the  rate  of  interest  and  has  given  a  new  direction  to 
the  employment  of  capital,  but  it  has  not  increased  the  number 
or  volume  of  exchanges  to  be  made.  A  certain  amount  of  the 
lumber  and  iron  in  the  community,  instead  of  being  sold  to 
building  contractors,  has  been  bought  by  the  new  railroad  com- 
pany. Certain  workingmen,  instead  of  finding  employment  as 
formerly  in  various  industries,  have  been  employed  in  con- 
structing the  new  railroad.  An  increase  in  the  demand  for 
capital  may  give  a  new  turn  to  the  employment  of  labor  and 
may  change  the  way  in  which  wealth  is  consumed,  but  cannot 
add  to  the  quantity  of  wealth  to  be  sold  or  to  the  amount  of 
money  with  which  it  is  to  be  exchanged. 

Although  a  demand  for  capital  is  not  a  demand  for  money 
or  for  credit,  nevertheless  an  increasing  demand  for  capital 
is  usually  accompanied  by  a  change  in  the  relation  between 
money  and  goods,  for  it  is  usually  attended  by  an  expansion  of 
credit  and,  therefore,  by  an  upward  tendency  of  prices.  In  our 
illustration  we  assume  that  certain  men  decide  to  build  a  rail- 
road and  begin  to  bid  for  capital  and  to  hire  laborers.  Their 


144  MONEY  AND    CURRENCY 

operations  will  undoubtedly  cause  the  prices  of  some  goods  to 
rise,  for  there  will  be  an  increased  demand  for  all  the  raw 
materials  which  enter  into  the  construction  and  equipment  of 
a  railroad.  The  advance  in  these  prices  will  in  some  measure 
be  counteracted  by  a  fall  of  the  prices  of  other  goods,  namely, 
those  goods  which  would  have  been  bought  by  the  ordinary 
run  of  borrowers  if  the  railroad  men  had  not  appeared  in  the 
field.  The  decline  of  these  prices,  however,  may  be  checked 
by  an  expansion  of  credit.  The  construction  of  so  important  a 
means  of  communication  as  a  railroad  always  excites  the  spec- 
ulative imagination  of  people  and  gives  rise  to  various  schemes 
for  the  profitable  employment  of  capital.  The  conditions  which 
inspired  the  railroad  promoters  with  confidence  in  their  project 
are  likely  to  exert  a  similar  effect  on  other  men,  and  stimu- 
late an  expansion  not  only  of  credit  but  of  enterprise  as  well. 
Thus  a  growing  demand  for  capital,  instead  of  increasing  the 
demand  for  money,  is  more  likely  to  lessen  that  demand  by  ren- 
dering the  supply  more  efficient.  A  proposition  near  the  truth 
would  be  the  following :  An  increase  in  the  demand  for  capital 
often  tends  to  increase  confidence  and  so  to  lessen  the  demand 
for  money  by  increasing  the  use  of  credit. 

A  demand  for  capital  is  not  even  a  demand  for  credit  as 
a  medium  of  exchange ;  in  other  words,  the  increase  in  the 
demand  for  capital  does  not  necessarily  lead  to  an  increase,  or 
call  for  any  increase,  in  credit  as  a  medium  of  exchange.  The 
borrowing  of  capital  itself  is,  of  course,  a  credit  transaction. 
An  increase  in  the  demand  may  raise  the  rate  of  interest 
and  so  increase  the  amount  of  capital  that  is  loaned.  To  that 
extent  an  increase  in  the  demand  for  capital  may  be  said 
to  increase  credit  transactions,  but  there  will  be  no  need  of 
increasing  the  volume  of  credit  to  be  used  as  a  medium  of 
exchange,  for  a  change  in  the  demand  for  capital,  while  it  will 
affect  the  rate  of  interest,  will  not  affect  the  quantity  of  goods 
exchanged  and  will  not  necessitate,  therefore,  an  increase  in 
the  medium  of  exchange  of  any  sort,  whether  money  or  credit. 
In  so  far  as  it  stimulates  saving  by  lifting  the  rate  of  inter- 
est a  growing  demand  for  capital  will  lead  to  an  increased 


THE   RATE  OF   INTEREST  145 

production  of  wealth,  making  necessary  larger  bank  reserves  and 
a  larger  volume  of  currency  in  circulation.  Thus  an  increasing 
demand  for  capital,  while  not  itself  a  demand  for  money,  may 
in  the  first  instance  lighten  the  strain  on  money  by  giving  a 
stimulus  to  credit,  and  may  later  give  rise  to  an  increasing  need 
for  money  by  the  stimulus  it  gives  to  the  productive  forces  of 
a  country ;  but  neither  of  these  effects  is  certain  to  follow. 

Even  in  a  country  where  credit  is  not  used  in  any  form  as 
a  medium  of  exchange,  an  increasing  demand  for  capital  would 
not  involve  a  larger  demand  for  money.  In  such  a  country, 
all  exchanges  being  for  money  in  hand,  the  borrower  would 
get  actual  money  from  the  lender,  and  it  would  seem  that  if  the 
demand  from  borrowers  increased  the  demand  for  money  must 
increase.  It  is  true  that  the  borrowing  demand  for  money 
would  increase,  but  there  would  be  no  increase  in  the  buying 
demand,  that  demand  which  determines  the  value  of  money. 
Lenders  would  have  in  their  possession  a  certain  amount  of 
money,  the  product  of  their  industry  and  saving,  and  they 
would  seek  to  lend  all  of  it ;  whether  they  could  get  4  per  cent 
or  8  per  cent  would  depend  on  the  strength  of  the  demand 
for  capital,  i.e.  the  borrowing  demand  for  money  ;  but  the 
demand  for  money  which  determined  the  value  of  money  would 
in  either  case  be  the  same,  for  manifestly  no  more  goods  could 
be  bought  with  money  borrowed  at  8  per  cent  than  with  money 
borrowed  at  4  per  cent. 

This  rather  abstract  analysis  of  the  demand  for  capital  may 
seem  unnecessary  to  the  reader,  but  he  will  find  later  that 
much  confusion  has  existed  upon  this  subject  in  the  minds  of 
practical  men,  if  not  among  theorists,  and  that  this  confusion 
has  led  to  costly  blunders  both  in  legislation  and  in  practice. 
The  vocabulary  of  the  "street"  tends  to  perpetuate  the  con- 
fusion, for  business  men  habitually  speak  of  the  rate  of  interest 
as  the  "price"  or  "value"  of  money.  The  notion  that  mere 
money  will  satisfy  a  demand  for  capital  has  a  strong  hold  on 
the  mind  of  the  average  banker.  This  explains  why  bankers  in 
New  York  City,  whenever  there  is  a  pinch  in  the  loan  market, 
usually  appeal  to  the  Secretary  of  the  Treasury  for  aid. 


146  MONEY  AND   CURRENCY 

EFFECTS  OF  CHANGES  IN  MONEY  SUPPLY 

99.  Except  during  a  period  of  price  readjustment,  the  supply 
of  money  in  a  country  has  no  relation  to  the  rate  of  interest. 
We  have  shown  that  the  rate  of  interest  —  and  the  bank  rate  of 
discount  as  well  —  depends  upon  the  supply  of  loanable  capital 
and  the  demand  for  it, — that  is,  upon  the  amount  of  a  country's 
savings  and  the  demand  for  them  for  productive  purposes.  If 
the  adjustment  of  prices  is  perfect,  the  supply  of  money  not 
being  increased  except  to  meet  an  increasing  demand,  the  rate 
of  interest  will  be  entirely  independent  of  the  amount  of  money 
in  existence.  The  saving  and  productive  capacity  of  a  people, 
upon  which  the  rate  of  interest  depends,  is  not  a  product  of 
the  money  supply,  but  of  their  thrift  and  energy  and  of  the 
country's  natural  resources. 

To  illustrate  :  Let  us  suppose  that  a  certain  community  is 
using  as  money  a  substance  the  supply  of  which  increases  at  a 
steady  rate,  say  10  per  cent  per  annum,  and  that  the  demand 
for  money  increases  at  the  same  rate,  so  that  the  level  of  prices 
remains  uniform.  Temporary  fluctuations  in  the  need  for 
"  hand-to-hand  money,"  we  will  suppose,  are  met  by  changes 
in  the  volume  of  bank  notes  outstanding.  In  such  a  community 
the  rate  of  interest  would  be  absolutely  independent  of  the 
money  supply.  In  good  times  the  rate  of  interest  would  rise, 
not  because  of  any  scarcity  of  money  but  because  borrowers 
would  be  able  and  willing  to  pay  more  for  the  use  of  capital ; 
the  production  of  wealth  would  increase,  more  money  would  be 
needed  as  a  basis  for  credit,  and  more  currency  to  serve  as  a 
medium  of  exchange ;  but  if  the  additional  money  and  currency 
were  at  hand  as  needed,  the  adjustment  of  prices  to  values 
would  be  maintained,  bank  deposits  and  the  supply  of  loanable 
capital  would  tend  to  become  larger  in  proportion  as  the  wealth 
of  the  community  grew,  and  the  demand  for  loanable  capital 
would  be  the  result  of  natural  conditions,  not  of  temporary 
conditions  produced  by  arbitrary  changes  in  the  money  supply. 

In  this  illustration  we  have  assumed  that  the  adjustment  of 
prices  to  the  money  supply  is  complete.  This  is  an  assumption 


THE  RATE  OF  INTEREST  147 

we  are  not  warranted  in  making  with  regard  to  any  civilized 
country  at  the  present  time.  Gold  and  silver  are  the  money  of 
civilization,  and  changes  in  their  supply  are  never  in  perfect 
accordance  with  changes  in  the  demand.  During  the  last  fifty 
years,  on  account  of  variations  in  the  supplies  of  the  precious 
metals,  there  has  been  no  period  when  prices  have  had  time  to 
get  into  adjustment  with  the  supply  of  money.  It  remains  for 
us,  therefore,  to  consider  what  influence  changes  in  the  supply 
of  money,  which  render  necessary  a  readjustment  of  prices, 
exert  upon  the  rate  of  interest. 

100.  A  temporary  increase  of  the  money  supply  in  excess 
of  the  demand  tends  to  lower  the  rate  of  interest  temporarily ; 
a  temporary  decrease  of  the  money  supply,  the  demand  not 
.also  decreasing,  tends  to  cause  the  rate  of  interest  to  rise. 

We  will  first  consider  the  effect  of  a  temporary  increase  in 
the  supply  of  money.  Let  us  recur  to  our  imaginary  discovery 
of  the  fabled  treasure  of  Captain  Kidd,  which  we  have  sup- 
posed to  amount  to  $100,000,000.  After  this  gold  has  been 
rendered  available  for  use  as  money,  the  country  evidently  has 
more  money  than  is  needed  for  the  maintenance  of  the  exist- 
ing price  level.  The  addition  to  the  supply  is  something  not 
necessary.  No  one,  however,  will  think  of  that  fact.  The  banks 
which  receive  the  gold  will  look  upon  it  as  they  have  been  in 
the  habit  of  looking  upon  gold;  that  is  to  say,  as  money  possess- 
ing a  definite  purchasing  power.  Their  power  to  loan  has  been 
increased,  but  there  has  been  no  increase  in  the  demand  for 
loans,  no  increase  in  the  demand  for  capital,  and  no  increase  in 
the  supply  of  loanable  capital.  In  order  to  bring  out  an  increase 
in  the  demand  the  banks  must  make  borrowing  more  attractive, 
and  this  they  will  do  by  lowering  the  rate  of  interest.  First 
the  "  call  loan "  rate  will  be  lowered  and  the  speculators  in 
New  York  who  have  been  paying  3  per  cent  for  money  on 
call  or  on  demand  will  be  offered  loans  at  2  per  cent  and 
will  increase  their  borrowings.  Lower  rates  will  also  be  offered 
to  manufacturers  and  business  men  in  general,  and  in  the 
course  of  time,  as  described  in  the  preceding  chapter,  this  new 
gold  will  get  into  circulation,  becoming  the  basis  of  additional 


148  MONEY  AND   CURRENCY 

credit  operations,  and  creating  apparently  a  new  demand  for 
goods.  Prices  will  rise  until  in  the  course  of  time,  in  a  few 
months  or  a  few  years,  a  higher  level  of  prices  will  have  been 
established,  which  will  make  necessary  more  money  than  for- 
merly for  the  exchange  of  the  same  amount  of  goods. 

Let  us  suppose  that  this  higher  level  of  prices  is  reached 
at  the  end  of  one  year  and  that  the  rise  amounts  to  10  per 
cent.  Evidently  the  man  who  formerly  found  $1000  equal  to 
his  needs  for  a  given  purpose  or  during  a  given  season  must 
now  have  $1100;  the  increased  money  supply  is  no  more 
effective  in  making  exchanges  than  the  old  supply  had  been,  the 
rise  of  prices  having  created  an  equivalent  increase  in  the  need 
for  money  units.  The  banks,  indeed,  will  have  more  money 
than  they  had  before  the  new  gold  came,  and  their  lending 
power  in  dollars  will  be  10  per  cent  greater  than  it  was ;  other 
things  being  equal,  the  need  for  capital  and  the  production  of 
wealth  not  having  changed,  their  deposits  and  their  loans  will 
in  terms  of  money  be  10  per  cent  greater,  but  this  increase  in 
money  will  represent  no  gain  whatever  in  values.  A  man  who 
wanted  to  borrow  $1000  the  year  before  will  now  need  $1100 
to  accomplish  the  same  purpose.  He  will  find  that  the  bank's 
power  to  accommodate  him  is  exactly  the  same  as  it  was;  in 
other  words,  he  will  borrow  $1100  with  the  same  ease  that  he 
could  have  borrowed  $1000  the  year  before;  he  will  pay  the 
same  rate  of  interest,  the  reduction  in  the  rate  having  been 
only  temporary. 

We  have  supposed  in  this  illustration  that  the  need  for  capi- 
tal does  not  change  during  the  year  and  that  prices  rise  10 
per  cent.  Evidently  the  money  needs  of  borrowers  increase 
10  per  cent  and  the  money  in  the  hands  of  the  banks  increases 
10  per  cent.  So  the  relation  between  the  demand  for  loanable 
funds  and  the  supply  is  not  altered.  Thus  the  final  result  of  a 
temporary  addition  to  the  money  supply  is  an  apparent  increase 
of  the  lending  power  of  banks,  but  their  real  lending  power  is 
unchanged. 

A  temporary  decrease  of  the  money  supply,  if  large  enough 
to  be  appreciable,  produces  effects  the  opposite  of  those  just 


THE  RATE  OF   INTEREST 


149 


described.  If  $100,000,000  were  in  the  course  of  a  few  months 
arbitrarily  taken  from  circulation  in  this  country,  the  lending 
power  of  the  banks  would  undoubtedly  be  greatly  affected 
at  first.  National  banks  of  this  country  are  now  (January  i, 
1905)  holding  over  $100,000,000  lawful  money  which  belongs 
to  the  government.  Let  us  suppose  that  Congress  passes  a 
law  requiring  that  the  banks  should  within  the  next  month  pay 
this  money  to  the  government  and  that  it  should  hereafter  be 
kept  in  Washington.  In  order  to  make  these  payments  the 
banks  all  over  the  country  would  be  obliged  to  call  in  loans, 
and  to  refuse  to  make  additional  loans.  Since  the  need  for 
capital  in  the  country  would  not  have  changed,  the  demand  for 
loans  would  be  in  excess  of  the  power  of  banks  to  lend,  and  the 
rate  of  interest  would  rise  to  a  high  figure,  only  those  borrowers 
being  accommodated  who  could  afford  to  pay  the  high  rate. 
As  a  result,  many  enterprises  would  surfer  from  lack  of  funds. 
Speculation  in  Wall  Street  and  on  the  produce  exchanges  of 
the  country  would  be  altogether  on  the  "  bear  "  side,  for  the 
calling  in  of  loans  by  the  banks  would  force  speculators  to 
sell  their  holdings  at  a  sacrifice.  Certain  industries  would  be 
crippled,  men  would  be  thrown  out  of  employment,  and  the 
sums  of  money  distributed  in  the  form  of  wages  would  diminish. 
The  adjustment  of  prices  to  the  diminished  money  supply 
would  have  a  depressing  influence  upon  various  forms  of  busi- 
ness and  industry,  and  would  discourage  entrepreneurs,  thus 
tending  to  lessen  the  demand  for  capital. 

The  settling  of  prices  would  lessen  the  amount  of  money 
needed  for  the  accomplishment  of  any  particular  enterprise,  and 
the  old  relation  between  the  demand  for  and  supply  of  loanable 
funds  would  finally  be  restored.  It  is  impossible  to  say  how 
long  a  time  would  elapse  before  the  price  level  would  be  prop- 
erly adjusted  to  the  supply  of  money,  and  the  rate  of  interest 
again  be  normal.  On  the  face  of  things  it  would  seem  that  an 
arbitrary  decrease  in  the  supply  of  money,  since  it  would  make 
much  capital  idle  and  so  tend  to  its  destruction,  would  produce 
an  effect  from  which  the  country  would  be  long  in  recovering. 
The  effect  of  an  increase  of  the  supply,  on  the  other  hand, 


150  MONEY  AND   CURRENCY 

would  be  a  stimulus  to  industry,  an  increase  in  the  power  of 
banks  to  lend,  and  an  increase  for  a  time  in  the  desire  to  bor- 
row, and  so  in  the  demand  for  capital,  which  might  work  much 
harm  through  the  stimulus  it  gave  to  speculation  and  to  under- 
takings for  which  there  was  no  real  need.  The  effect,  however, 
of  an  arbitrary  decrease  of  a  supply  would  seem  to  be  much 
more  injurious.1 

101.  A  steady  or  continuous  increase  or  decrease  in  the 
money  supply  not  corresponding  to  changes  in  the  demand, 
since  it  perpetuates  a  maladjustment  of  prices,  produces  a  con- 
stant effect  upon  the  demand  for  and  supply  of  capital  and  so 
has  a  constant  influence  upon  the  rate  of  interest. 

We  will  first  consider  the  effect  upon  the  rate  of  interest  of 
a  steady  increase  in  the  money  supply,  and  will  suppose  that 
this  increase  is  constant  and  a  little  in  excess  of  the  need  for 
money,  so  that  prices  tend  steadily  upward.  We  shall  find  that 
such  constant  increase  of  the  money  supply  will  stimulate  the 
demand  for  capital  and  tend  to  cause  the  rate  of  interest  to 
rise  above  the  normal. 

We  have  already  seen  that  the  first  addition  to  the  supply  of 
money  will  cause  the  rate  of  interest  to  fall  temporarily  and 
bring  about  an  uneven  uplift  of  prices,  speculative  goods  ris- 
ing first  and  retail  prices  last.  All  these  price  changes  are 
attributed  by  people  in  general  to  an  increasing  demand  for 
goods.  Few  business  men  suspect  that  their  ability  to  sell  goods 
at  higher  prices  than  formerly  is  in  any  way  due  to  a  change  in 
the  money  supply.  So  far  as  the  average  man  is  concerned,  the 
new  demand  for  his  goods  is  a  real  demand  backed  by  sufficient 
money  to  support  it.  If  the  addition  to  the  money  supply  is 
constant,  particularly  if  it  is  gradual  and  steady,  being  made  by 
monthly  increments  year  after  year,  there  will  be  a  constant 
tendency  of  prices  to  rise,  producers  will  find  their  profits  grow- 
ing, the  demand  for  capital  will  consequently  increase,  and  the 

1  An  arbitrary  increase  or  decrease  of  the  money  supply  is  one  not  called  for 
by  the  demand,  an  increase  or  decrease  which  renders  necessary  a  new  adjust- 
ment of  prices.  Any  change  in  the  supply  which  corresponds  to  a  change  in  the 
demand  will  not  affect  the  price  level  and  could  not  be  called  an  arbitrary  change. 


THE   RATE  OF   INTEREST  151 

rate  of  interest  will  rise.  Men  will  not  stop  to  consider  the 
fact  that  the  value  of  money  has  changed.  To  the  business 
man  a  dollar  is  a  dollar ;  he  measures  his  prosperity  in  dollars ; 
if  the  number  of  dollars  into  which  he  can  convert  his  stock  is 
increasing,  he  takes  it  for  granted  that  his  wealth  is  growing 
at  the  same  pace. 

As  a  result,  therefore,  of  a  steady  upward  tendency  of  prices 
and  of  the  consequent  increase  of  what  may  be  called  the 
"money  wealth"  and  "money  profits"  of  business  and  industry, 
men  in  business  are  eager  to  extend  their  operations.  New- 
comers rush  into  industry  and  business  from  the  professional 
and  other  fields.  Lawyers  turn  promoters  for  the  develop- 
ment of  oil  fields  or  for  the  construction  of  street  railways. 
Teachers  and  physicians  abandon  their  callings  and  study  the 
A  B  C  of  Wall  Street.  Preachers  dabble  in  real  estate  or  take 
up  the  schemes  of  eager  and  confident  inventors.  All  this  rush 
into  the  industrial  field  is  accompanied  by  a  strong  demand  for 
capital,  and  bankers,  who  are  usually  affected  by  the  contagion 
of  the  time,  find  that  they  can  extend  their  credit  to  the  utmost 
limit  at  an  unusually  high  rate  of  interest.  In  other  words, 
the  increase  in  money  profits  brought  about  by  maladjustment 
of  prices  arouses  an  artificial  demand  for  capital  and  so  lifts 
the  rate  of  interest  above  its  normal  level,  or  that  which  it 
would  have  held  if  prices  had  not  been  disturbed. 

1 02.  How  long  the  industrial  body  can  stand  the  effect  of 
this  money  stimulant  gradually  administered  experience  alone 
can  decide,  and  experience  seems  to  teach  the  lesson  that  final 
disaster,  however  long  deferred,  is  inevitable.  It  is  certain  that 
no  mere  change  in  the  relation  between  the  demand  for  and 
supply  of  money  can  produce  changes  in  the  wants  of  men 
sufficient  to  justify  remarkable  changes  in  the  production  of 
wealth.  All  this  expansion  of  credit  and  abnormal  demand  for 
capital  are  usually  attended  by  a  confident  popular  belief  that 
at  last  a  period  of  good  times  has  arrived  which  will  have  no 
end.  Wild  speculation  ensues  in  this  or  that  commodity,  —  in 
real  estate,  in  railroad  stocks,  in  wheat,  in  cotton,  —  and  numer- 
ous enterprises  are  undertaken  far  in  excess  of  the  immediate 


152  MONEY  AND   CURRENCY 

demand.  Some  morning  a  well-known  firm  or  corporation 
whose  ventures  have  entailed  unusual  risks  is  notified  by  its 
bank  that  some  of  its  outstanding  paper  must  be  taken  up. 
Unable  to  realize  on  its  assets  without  great  sacrifice,  it  calls 
upon  some  of  its  own  debtors  for  payment,  but  they  too  are 
unprepared  for  immediate  liquidation.  The  next  morning  the 
newspapers  announce  the  firm's  suspension,  and  rumor  runs 
through  the  street  crying  that  many  other  important  houses 
are  affected.  The  more  timid  creditors  bring  pressure  to  bear 
upon  their  debtors.  Some  large  corporation  fails  and  drags  a 
bank  down  with  it.  Then  there  begins  a  general  scramble  on 
the  part  of  all  for  the  payment  of  debts  due  them.  No  man 
longer  dare  trust  his  fellow.  Credit  almost  disappears  from 
the  business  world,  and  prices  fall  with  a  velocity  that  brings 
ruin  to  every  weak  bank  and  business  concern  and  to  many 
others  whose  solvency,  if  no  panic  had  come,  would  have  been 
strongly  buttressed. 

During  this  collapse  and  panic  the  rate  of  interest  rises  to 
abnormal  heights.  There  is  now  a  scramble  for  loans,  not  for 
use  in  the  production  of  wealth  but  for  the  payment  of  debts. 
After  the  panic  is  over  and  the  wreck  has  been  cleared  away 
there  will  follow  a  period  of  dullness,  and  the  rate  of  interest 
will  be  as  much  below  the  normal  as  it  formerly  was  above. 

If  the  money  supply  continues  steadily  to  increase,  the  time 
will  soon  come  again  when  men,  tempted  by  the  low  rate  of 
interest  and  by  restored  confidence  in  the  country's  resources, 
will  once  more  make  the  round  of  borrowing  and  producing. 
In  the  meantime  a  new  generation  comes  upon  the  field,  lacking 
the  experience  of  its  elders  ;  again  new  enterprises  are  floated, 
and  the  cycle  of  unwise  production,  speculation,  and  panic  is 
repeated. 

103.  A  steady  and  continuous  decrease  in  the  supply  of 
money,  or  its  failure  to  increase  as  fast  as  the  demand,  tends  to 
cause  the  rate  of  interest  to  fall.  Such  a  decrease,  whether 
absolute  or  relative,  i.e.  whether  the  supply  has  actually  grown 
less  or  has  merely  failed  to  increase  at  even  pnce  with  the 
demand,  must  lead  to  a  fall  of  prices,  as  was  explained  in 


THE  RATE  OF  INTEREST  153 

Chapter  VI.  The  first  effect,  as  described  in  Section  100, 
will  be  a  lessening  of  the  lending  power  of  banks  and  an 
upward  tendency  of  the  rate  of  interest.  There  will  be,  in  other 
words,  what  business  men  call  a  "scarcity  of  money,"  by  which 
is  meant  a  scarcity  of  loanable  funds.  Since  at  first  no  change 
will  have  been  produced  in  the  demand  for  funds,  the  borrow- 
ing demand  will  be  undiminished  and  the  banks  will  be  able 
to  get  a  higher  rate  of  interest.  Certain  borrowers  will  be 
forced  to  abandon  or  to  curtail  their  operations ;  of  those  who 
succeed  in  negotiating  loans  at  the  high  rate  of  interest  many 
will  find  themselves  embarrassed  when  the  time  of  repayment 
comes,  for  the  prices  of  their  goods  will  be  lower  than  antici- 
pated and  their  receipts  of  money  will  be  smaller.  As  a 
result  of  these  two  circumstances  —  that  some  operations  are 
abandoned  or  curtailed  and  that  business  men  find  difficulty  in 
making  repayment  of  loans  —  laboring  men  find  increasing 
difficulty  in  getting  employment  at  the  old  rate  of  wages,  the 
amount  of  money  and  credit  at  the  command  of  people  will 
diminish,  and  retailers  here  and  there  will  with  reason  complain 
that  times  are  dull. 

It  must  be  remembered  that  the  prices  of  goods  do  not  tend 
to  fall  uniformly  under  these  conditions,  for  the  readjustment 
of  prices  is  always  a  slow,  uneven  process.  Often  producers 
will  find  that  the  prices  of  their  raw  materials  have  not  changed 
although  the  price  of  their  product  has  fallen  off.  Such  a 
situation  is  discouraging.  Other  producers  find  some  encour- 
agement in  the  fact  that  the  prices  of  their  raw  materials  have 
fallen,  but  the  demand  for  their  product  has  mysteriously 
weakened  and  they  are  forced  to  sell  without  the  expected 
profit. 

104.  It  is  easy  to  trace  the  effect  of  such  a  condition  upon 
the  demand  for  capital  or  loanable  funds.  To  the  average 
business  man  the  supply  of  goods  seems  already  to  be  in 
excess  of  the  demand.  Instead  of  feeling  like  enlarging  his 
operations,  he  sees  a  necessity  for  curtailment.  Instead  of 
talking  about  the  construction  of  a  new  shop,  he  considers  the 
advisability  of  closing  his  old  one  or  of  running  half  time  in 


154  MONEY  AND   CURRENCY 

order  to  ''give  demand  a  chance  to  overtake  supply."  Under 
these  conditions  there  will  be  heard  general  talk  about  over- 
production and  excessive  competition,  and  more  men  will  be 
seeking  to  get  out  of  business  than  to  get  in.  In  other  words, 
the  demand  for  capital  will  surfer  a  serious  check  on  account 
of  the  depression  caused  by  the  gradual  and  not  generally 
understood  weakening  of  prices.  Banks  will  find  their  lending 
power  greater  than  the  demand  and  will  begin  to  lower  the 
rate  of  interest  in  order  to  attract  borrowers. 

If  these  conditions  continue  for  ten  years  or  more,  there 
will  be  intervals  of  reviving  credit,  rising  prices,  and  temporary 
advances  in  the  rate  of  interest.  The  production  of  wealth 
and  the  saving  of  capital  will  go  on,  but  not  at  a  uniform  pace. 
Expanding  credit  may  lift  the  prices  for  a  year  or  two,  and 
then  they  will  drop  to  a  lower  level  than  they  had  reached 
before,  and  another  period  of  depression  and  discouragement 
will  ensue. 

At  such  times,  it  should  be  noted,  neither  the  banker  nor 
the  average  business  man  will  think  of  ascribing  the  hard 
times  to  any  scarcity  of  money.  The  banks  will  be  glutted  with 
money  and  will  be  unable  to  find  uses  for  it.  The  statistics 
of  banks  will  give  the  impression  that  the  country  is  burdened 
with  an  overplus  of  money  as  well  as  with  an  overplus  of  goods. 
But  if  the  reader  has  followed  the  analysis,  he  will  see  that  the 
real  cause  of  the  low  rate  of  interest  and  of  the  excessive  supply 
of  cash  in  the  banks  is  the  weakening  in  the  demand  for  capital 
which  has  been  caused  by  the  fall  of  prices.  The  disease  from 
which,  under  these  conditions,  the  business  of  a  country  is 
suffering  should  be  diagnosed  as  industrial  anaemia  rather  than 
as  plethora  of  goods. 

The  reader  must  not  conclude  from  this  discussion  that 
changes  in  the  supply  of  money  are  the  all-important  factor  in 
the  determination  of  the  rate  of  interest.  The  rate  of  interest, 
it  must  be  remembered,  is  the  outcome  of  the  demand  for  and 
supply  of  capital,  and  these  depend  upon  many  circumstances, 
of  which  the  maladjustment  of  prices  is  only  one.  It  has  been 
shown  in  this  chapter  that  a  single  arbitrary  increase  in  the 


THE  RATE  OF  INTEREST 


155 


supply  of  money  tends  to  cause  the  rate  of  interest  to  fall,  and 
that  a  continuous  increase  of  the  supply,  since  it  artificially 
stimulates  the  demand  for  capital,  gives  the  rate  of  interest  an 
upward  tendency ;  and  that  a  diminution  of  the  money  supply 
has  an  opposite  effect,  the  rate  rising  if  the  decrease  is  tempo- 
rary, but  tending  downward  if  the  money  supply  for  any  length 
of  time  fails  to  keep  pace  with  an  increasing  demand.  The 
whole  truth  may  be  summed  up  as  follows  :  The  rate  of  interest 
depends  on  forces  distinct  from  money,  but  with  these  forces 
changes  in  the  relation  between  the  demand  for  and  supply  of 
money  are  likely  to  interfere. 

105.  In  this  connection  the  course  of  the  London  money 
market  during  the  nineteenth  century  is  of  interest.  London 
adopted  the  gold  standard  in  1816,  the  price  level  thereafter 
being  determined  by  the  value  of  gold.  The  world's  stock  of 
gold  available  for  use  as  money  was  decreasing  between  1810 
and  1850,  and  we  should  expect  during  that  period  a  decline  in 
the  London  rate  of  interest.  The  statistics  do  not  disappoint 
us.  In  1824  the  market  rate  in  London  was  3.5  per  cent.  The 
panic  in  1826  made  the  average  rate  for  that  year  4.5  per  cent. 
By  1833  the  rate  had  fallen  to  2.7  per  cent.  There  was  a 
slight  rise  in  succeeding  years,  due  largely  to  the  expansion  of 
credit.  The  panic  of  1839  raised  the  rate  to  5  per  cent.  There- 
after there  was  almost  a  steady  decline  until  the  panic  year  of 
1847,  when  the  rate  rose  to  5.9  per  cent.  In  the  next  five 
years  the  rate  almost  steadily  declined,  until  in  1852  the  aver- 
age rate  was  only  1.9  per  cent.  At  this  date  new  supplies  of 
gold  from  Australia  and  California  were  making  their  way  into 
Europe  and  the  interest  rate  took  an  upward  turn  in  London, 
being  3.7  per  cent  in  1853,  4.9  in  1854,  4.7  in  1855,  5-9  in 
1856,  and  7.1  in  the  panic  year,  1857.  The  interest  rate  fell  to 
3.1  in  1858  and  2.5  in  1859,  rates  which  were  doubtless  below 
the  normal.  In  1860  a  rise  began  again,  the  rate  being  5.5  in 
1 86 1  and  6.7  in  1866,  the  next  panic  year.  Thereafter  there 
was  an  immediate  decline,  the  rate  for  1867  being  2.3  and  for 
1868,  1.8.  Then  followed  a  slight  advance  of  the  rate  until 
1873,  when  the  average  rate  was  4.5  per  cent.  Here  set  in  a 


156  MONEY  AND   CURRENCY 

gradual  decline  of  prices  due  to  what  we  have  called  a  relative 
decrease  in  the  supply  of  gold,  the  supply  not  increasing  so 
rapidly  as  the  demand.  It  was  accompanied  in  London  by  a 
constant  tendency  of  the  rate  of  interest  to  fall,  although  there 
were  occasional  advances  caused  by  the  expansion  of  credit. 
The  average  market  rate  in  London  in  1894  was  I  per  cent 
and  in  1895  .8  of  I  per  cent  per  annum.  After  1895  the  effect 
of  the  new  gold  from  South  Africa  began  to  be  felt  in  England 
and  the  interest  rate  again  began  an  upward  journey.  Prices 
of  commodities  in  England  between  1896  and  1902  rose  some- 
thing like  25  per  cent,  and  the  rate  of  interest  rose  from  .8  of 
I  per  cent  in  1896  to  4  per  cent  in  1903. 

Since  1897  prices  in  the  United  States,  according  to  the 
statistics  of  the  Department  of  Commerce  and  Labor,  have 
risen  some  25  per  cent.  In  1897  commercial  (double-name  sixty 
days)  paper  sold  in  New  York  around  3.5  per  cent.  There  were 
only  fifteen  weeks  during  which  it  rose  above  3.5  per  cent,  and 
it  never  went  above  4.5  per  cent.  For  sixteen  weeks  it  did  not 
rise  above  3  per  cent.  In  1898  the  rise  of  prices  began  and 
the  rate  of  interest  followed  suit.  It  touched  5  per  cent  during 
nine  weeks  and  6  per  cent  during  seven  weeks.  In  1899  it 
reached  5  per  cent  during  twelve  weeks  and  6  per  cent  during 
thirteen  weeks.  It  averaged  over  4  per  cent  throughout  the 
year.  In  1900  and  1901  it  averaged  about  4.5  per  cent,  sinking 
below  4  per  cent  during  only  a  few  weeks  each  year.  In  1902 
the  rate  never  fell  below  4  per  cent.  The  rate  was  5  per  cent  and 
higher  for  fourteen  weeks  and  6  per  cent  plus  commission  for 
twelve  weeks.  In  1903  the  rate  continued  between  5  and  6  per 
cent  throughout  the  year.  There  was  a  decline  in  1904,  but  the 
rate  closed  the  year  at  4.5.  This  decline  in  1904  was  the  natural 
sequence  of  the  break  in  the  stock  market  in  1903  and  of  the 
resultant  loss  of  confidence  among  business  men.  The  loanable 
funds  withdrawn  from  Wall  Street  sought  employment  in  the 
world  of  industry  and  trade,  and  a  decline  in  the  rate  of  interest 
was  inevitable.1 

1  Any  conjecture  with  regard  to  the  future  course  of  prices  and  the  interest  rate 
must  take  into  account  the  fact  that  during  the  last  seven  years  great  commercial 


THE   RATE  OF   INTEREST 


157 


1 06.  It  may  seem  strange  to  the  reader  that  banks  should 
have  a  large  supply  of  money  on  hand  at  a  time  when  prices 
are  falling  because  of  a  relative  decrease  of  the  money  supply. 
It  would  seem  at  first  glance  that  abundance  of  money  in  the 
bank  reserves  would  mean  that  money  was  plentiful.  How  can 
money  be  scarce  when  banks  have  more  than  they  can  lend? 
It  is  a  fact,  as  can  be  affirmed  by  an  examination  of  bank  sta- 
tistics of  the  United  States  between  1870  and  1896,  that  banks 
have  more  idle  money  on  hand  during  a  period  of  falling  prices 
than  they  have  during  one  of  rising  prices.  This  fact  has  often 
led  at  such  a  time  to  the  assertion  that  money  is  abundant, 
and  has  often  been  pointed  to  as  evidence  that  prices  were 
falling  not  because  of  a  scarcity  of  money  but  because  costs 
of  production  were  falling.  Now  abundant  bank  reserves  do 
not  signify  an  abundance  of  money  but  an  abundance  of  loan- 
able capital.  It  has  already  been  pointed  out  that  in  a  period 
of  falling  prices  there  will  always  be  a  surplus  of  capital,  for 
the  demand  for  capital  will  have  fallen  off.  This  surplus  capital 
will  find  its  way  into  the  banks  in  the  form  of  credit  and  money  ; 
it  is  natural,  therefore,  that  in  such  a  time  the  banks  should 
have  more  money  on  hand  than  they  can  use  profitably.  This 
money  in  the  banks  has  no  influence  whatever  upon  prices,  for 
it  is  not  in  the  hands  of  the  people  who  can  use  it  in  the 
purchase  of  goods,  and  is  not  serving  as  a  basis  for  credit. 
Business  men  have  little  desire  to  borrow  and  banks  are  timid 
about  lending,  the  outlook  being  unpromising.  The  banks  can- 
not use  their  money  in  buying  goods,  for  that  is  not  the  way 
their  profits  are  earned ;  they  can  only  lend  it,  and  satisfactory 

nations  have  been  continuously  at  war,  and  that  in  consequence  a  normal  expan- 
sion of  credit  has  been  impossible.  Since  1895  the  gold  holdings  of  the  great 
banks  of  the  world,  including  the  national  banks  of  the  United  States,  have 
increased  by  over  $1,000,000,000,  but  much  of  this  new  gold,  instead  of  being  given 
employment  in  the  world  of  trade  and  industry,  has  been  hoarded  in  banks  to  pro- 
vide for  the  extraordinary  contingencies  of  war,  both  actual  and  possible.  Not  until 
the  world's  peace  is  comparatively  assured  will  credit  take  wing  and  bring  all  the 
new  gold  into  potential  contact  with  goods  and  securities.  Concerning  the  precise 
effect  upon  prices  and  the  rate  of  interest  we  can  only  speculate,  but  that  prices 
must  tend  upward  and  the  money  market  be  subject  to  violent  disturbances  we 
can  be  reasonably  certain. 


158  MONEY  AND   CURRENCY 

borrowers  for  it  they  cannot  find.  The  large  sums  of  money 
held  by  banks  during  a  period  of  falling  prices  are  not  an  indi- 
cation of  the  plentifulness  of  money  but  of  the  opposite. 


COMMODITY  RATE  OF  INTEREST 

107.  The  maladjustment  of  prices  due  to  changes  in  the 
relation  between  the  demand  for  and  supply  of  money  causes 
the  money  rate  of  interest  to  differ  from  what  is  called  the 
"commodity  rate."  By  commodity  rate  of  interest  is  meant  the 
percentage  figured  in  goods  instead  of  in  money.  The  money 
rate  and  the  commodity  rate  are  always  equal  if  the  level  of 
prices  does  not  change  during  the  life  of  a  loan.  Thus  if  a 
man  loan  $1000  at  6  per  cent  for  one  year,  the  $1060  which 
he  receives  at  the  end  of  the  year  will,  if  the  price  level  has  not 
changed,  purchase  6  per  cent  more  goods  than  he  could  have 
bought  with  the  $1000  at  the  beginning  of  the  year.  His  real 
wealth  has  increased  6  per  cent  ;  he  is  6  per  cent  better  off  not 
only  with  respect  to  money  but  also  with  respect  to  goods.  The 
commodity  rate  of  interest  on  that  loan  is  identical  with  the 
money  rate.  But  let  us  suppose  that  the  loan  was  made  in 
the  beginning  of  January,  1865,  in  the  United  States,  in  which 
year,  according  to  the  Falkner  index  number,  the  level  of 
prices  rose  over  30  per  cent.  Was  the  lender  who  put  out 
money  at  6  per  cent  at  the  beginning  of  1865  better  off  when 
he  received  $1060  in  payment  December  31,  1865  ?  Certainly 
not.  He  had  6  per  cent  more  money,  to  be  sure,  but  on  account 
of  the  30  per  cent  advance  in  prices  this  $1060  which  he 
received  at  the  end  of  the  year  would  buy  less  than  he  might 
have  bought  with  the  $1000  which  he  loaned  at  the  beginning 
of  the  year.  The  purchasing  power  of  each  dollar  had  decreased 
on  account  of  the  advance  of  prices.  What  formerly  could 
have  been  bought  with  $i.'oo  now  required  an  expenditure 
of  $1.30.  Since  130  cents  would  buy  no  more  at  the  end  of  the 
year  than  100  cents  would  have  bought  at  the  beginning,  a 
dollar  at  the  end  of  the  year  would  buy  only  l|$,  i.e.  77  per 
cent,  as  much  as  it  bought  at  the  beginning  of  the  year.  In 


THE  RATE  OF   INTEREST 

that  year,  therefore,  the  dollar  declined  in  value  23  per  cent. 
Hence  $1060  received  by  a  lender  at  the  end  of  the  year  would 
buy  no  more  goods  than  could  have  been  bought  with  23  per 
cent  less  money  at  the  beginning  of  the  year;  that  is,  he  could 
buy  no  more  than  he  could  have  bought  with  $816.20  at  the 
time  the  loan  was  made.  Evidently  when  we  estimate  his  real 
wealth  we  find  that  his  loan  has  netted  him  a  loss  and  not  a 
profit.  He  is  something  like  18  per  cent  worse  off  than  when 
he  made  the  loan.  The  commodity  rate  of  interest,  therefore, 
instead  of  being  positive,  a  payment  by  the  borrower  to  the 
lender,  was  negative,  a  payment  of  18  per  cent  by  the  lender 
to  the  borrower. 

.  A  general  fall  of  prices  has  the  opposite  effect  upon  the 
commodity  rate  of  interest.  If  during  the  life  of  a  6  per  cent 
loan  general  prices  fall  10  per  cent,  the  lender,  when  he  gets 
back  his  principal  and  interest,  is  more  than  6  per  cent  better 
off  than  he  was  when  he  made  the  loan.  He  has  6  per  cent 
more  money,  and  each  dollar  will  buy  1 1  per  cent  more  goods 
than  each  of  the  dollars  he  loaned.  He  is  really,  therefore, 
17  per  cent  better  off  than  when  he  made  the  loan.  His  rate 
of  interest,  figured  in  goods,  is  17  per  cent. 

It  would  seem  that  the  low  commodity  rate  of  interest 
realized  by  lenders  during  a  period  of  rising  prices  would  lead 
them  to  advance  the  money  rate,  and  that  the  high  rate  paid 
by  borrowers  during  a  period  of  falling  prices  would  tend  to 
discourage  borrowing  and  so  cause  the  rate  of  interest  to  fall. 
As  has  already  been  pointed  out,  the  rate  of  interest  does  tend 
to  rise  during  a  period  of  rising  prices  and  to  fall  during  a 
period  of  falling  prices,  but  the  reasons  therefor  are  not  to  be 
found  in  the  commodity  rate  of  interest.  Business  men  know 
nothing  about  the  commodity  rate  of  interest.  They  never 
speak  of  it  and  never  take  it  into  account.  To  them  money  is 
the  all-important  consideration  and  the  money  rate  of  interest 
always  represents  a  real  and  positive  return.  The  tendency  of 
the  rate  of  interest  to  rise  during  good  times  is  not  due  to  the 
fact  that  it  must  rise  in  order  to  give  the  lender  a  fair  return 
on  his  capital,  but  to  the  fact  that  when  prices  are  rising  there  is 


160  MONEY  AND   CURRENCY 

an  increased  desire  on  the  part  of  men  to  borrow,  —  an  increas- 
ing demand  for  capital.  On  the  other  hand,  when  prices  are 
falling  borrowers  do  not  force  down  the  money  rate  of  interest 
because  the  commodity  rate  is  high  ;  they  merely  are  less  eager 
to  borrow  because  the  returns  upon  borrowed  capital  are  less 
certain.  During  a  period  of  falling  prices  the  money  rate  of 
interest  falls,  not  in  order  that  an  adjustment  between  the 
money  rate  and  commodity  rate  may  be  brought  about  but 
because  the  demand  for  capital  grows  less. 

LITERATURE 

MILL,  Political  Economy,  Book  I,  chaps,  iv,  v,  and  xi ;  Book  III,  chap, 
xxiii ;  IRVING  FISHER,  Appreciation  and  Interest  (publications  of  the  Amer- 
ican Economic  Association,  1896)  ;  ROBERT  GIFFEN,  Essays  in  Finance, 
second  series,  chap,  ii,  "  Gold  Supply  :  The  Rate  of  Interest  and  Prices." 
Data  concerning  the  market  rate  of  interest  in  London  and  New  York  may 
be  found  in  FISHER,  Appreciation  and  Interest  j  PALGRAVE,  Batik  Rate 
and  the  Money  Market;  and  the  Financial  Review,  an  annual  publication 
of  the  New  York  Commercial  and  Financial  Chronicle. 


CHAPTER  VIII 

THE   IMPORTANCE  OF   PRICE 

108.  "  Price  "  is  a  more  important  word  in  the  business  world  than  either  "  value  " 
or  "utility."  109.  Changes  in  the  price  level  are  important  because  of  four  cir- 
cumstances :  (i)  the  use  of  credit;  (2)  the  fact  that  production  involves  a  period  of 
time;  (3)  the  fact  that  prices  do  not  change  uniformly;  (4)  the  psychology  of  con- 
fidence and  depression,  no.  An  appreciating  standard  depresses  industry,  but  it 
increases  the  purchasing  power  of  bonds,  annuities,  wages,  and  salaries,  and  so 
apparently  benefits  both  capitalist  and  laboring  classes.  The  entrepreneur,  how- 
ever, is  crippled,  and  other  classes  must  suffer  with  him.  in.  A  depreciating 
standard  seems  to  work  injury  to  creditors,  especially  the  bondholder  and  the 
annuitant,  and  to  the  salaried  and  wage-earning  classes,  while  it  apparently  bene- 
fits the  debtor  and  entrepreneur.  The  losses  seem  fully  offset  by  the  stimulus 
given  to  industry.  112.  In  a  consideration  of  the  desirability  of  a  permanent  stand- 
ard of  prices  the  production  of  wealth  is  of  more  importance  than  long-time  rela- 
tions between  debtors  and  creditors.  113.  A  brief  discussion  of  the  multiple 
standard,  the  utility  standard,  and  the  labor  standard.  1 14.  The  commodity  stand- 
ard now  in  use  is  a  product  of  evolution,  and  will  probably  not  be  abandoned 
because  of  theoretical  considerations.  115.  A  plan  for  the  use  of  the  multiple 
standard  in  the  liquidation  of  loans. 

1 08.  It  has  been  shown  in  the  preceding  chapters  that  the 
price  of  a  commodity  shows  the  value  of  money  in  that  com- 
modity, and  that  general  prices  indicate  the  general  value  or 
purchasing  power  of  money ;  that  the  price  of  a  commodity 
must  change  when  there  is  a  change  in  its  own  value  or  a 
change  in  the  value  of  money  ;  and  that  whenever  there  is 
a  change  in  the  value  of  money  the  prices  of  all  commodities 
tend  to  be  affected,  but  that  they  do  not  all  change  at  the 
same  time  or  in  the  same  degree.  In  a  country  like  the  United 
States,  with  its  numerous  banks  and  well-developed  credit  sys- 
tem, general  changes  of  prices  begin  first  with  those  articles 
which  are  the  favorites  of  speculators,  like  railroad  stocks  and 
such  commodities  as  wheat,  corn,  oats,  copper,  lead,  cotton,  etc., 
and  then  run  down  through  wholesale  and  retail  prices  and 
last  of  all  touch  real  estate  and  customary  prices.  We  have 
also  seen  that  the  maladjustment  of  prices  caused  by  any  great 

161 


1 62  MONEY  AND   CURRENCY 

change  in  the  relation  between  the  demand  for  and  supply  of 
money  has  a  subtle  but  real  effect  upon  industry  and  upon  the 
rate  of  interest.  In  this  chapter  we  shall  consider  the  important 
relation  of  prices  to  human  welfare. 

In  many  treatises  upon  political  economy  the  subject  of  price 
has  received  inadequate  treatment.  It  has  been  commonly 
assumed  that  "value"  and  "utility"  are  the  important  words, 
and  this  assumption  would  be  correct  if  there  were  always 
a  perfect  adjustment  or  correspondence  between  prices  and 
values.  If  the  value  of  money  were  stable,  the  question  of 
prices  would  be  far  less  important  than  it  is,  for  changes  in 
the  prices  of  goods  would  always  be  due  to  changes  in  their 
value,  so  that  the  whole  problem  of  exchange  would  be  one  of 
value  rather  than  of  price.  A  fall  in  the  price  of  an  article 
would  mean  a  fall  in  its  value,  and  the  cause  would  lie  in  the 
conditions  affecting  the  demand  for  and  supply  of  the  article. 
Mr.  Mill  in  his  Political  Economy  tacitly  assumes  that  the 
value  of  money  is  stable  and  then  proceeds  to  analyze  the 
processes  of  production  and  exchange  as  if  no  money  were 
used.  According  to  his  view  goods  were  exchanged  for  goods, 
money  being  merely  the  medium  for  effecting  the  exchange 
and  in  no  wise  interfering  with  it. 

If  our  conclusions  are  correct  with  regard  to  the  effects  of 
changes  in  the  value  of  money  upon  prices,  it  must  be  con- 
ceded that  in  the  world  of  business  and  industry,  where  wealth 
is  actually  produced  and  exchanged,  the  prices  of  goods  are  of 
more  consequence  than  either  their  values  or  their  utilities.  It 
is  true  that  price  is  an  expression  of  value  and  that  utility  is 
at  the  foundation  of  value  ;  yet  the  only  concept  with  which 
men  are  familiar,  the  one  about  which  all  of  their  thinking  cen- 
ters, is  the  concept  of  price.  Men  do  not  exchange  goods  for 
goods  but  for  money.  Either  money  or  a  contract  to  deliver 
money  figures  in  every  exchange.  Men  estimate  their  wealth 
and  their  profits  in  money,  not  in  the  quantity  of  goods  which 
they  can  buy  or  which  they  already  possess. 

The  level  of  prices,  it  should  be  noted,  is  itself  of  no  impor- 
tance ;  it  does  not  matter  whether  prices  are  high  or  low,  if 


THE  IMPORTANCE  OF  PRICE  163 

there  is  perfect  adjustment  between  prices  and  the  supply  of 
money.  Whether  the  value  of  the  dollar  shall  be  much  or  little, 
whether  prices,  in  other  words,  shall  be  high  or  low,  is  of  no  more 
consequence  than  the  question  whether  the  mile  shall  contain 
ten  thousand  or  five  thousand  yards.  But  changes  in  the  value 
of  a  dollar,  that  is,  changes  in  the  level  of  prices,  are  of  the 
utmost  importance,  for  they  are  always  attended  by  an  irregular 
readjustment  of  prices.  The  question  of  high  and  low  prices  is 
entirely  different  from  the  question  of  rising  and  falling  prices. 

When  prices  are  rising  with  more  or  less  steadiness  the 
monetary  standard  is  called  a  "depreciating"  standard  ;  when 
they  are  falling  the  standard  is  said  to  be  "appreciating," 
growing  more  valuable.  Economists  have  generally  held  that 
.the  effects  of  a  depreciating  standard,  if  the  rise  of  prices 
is  not  too  pronounced,  are  less  harmful  than  the  effects  of  an 
appreciating  standard.  We  have  already  in  the  preceding  chap- 
ter had  occasion  to  call  attention  to  the  remarkable  stimulus 
to  industry  which  follows  from  a  steady  and  continuous  rise  of 
prices,  and  to  the  depressing  effect  of  falling  prices. 

109.  The  disturbing  effects  of  a  change  in  the  value  of  the 
standard  are  due  to  four  circumstances,  —  (i)  the  use  of  credit, 
(2)  the  fact  that  production  involves  a  period  of  time,  (3)  the 
fact  that  prices  do  not  change  uniformly,  and  (4)  the  psychol- 
ogy of  confidence  and  depression. 

It  is  evident  that  if  men  did  not  borrow  and  lend,  a  change  in 
the  level  of  prices  would  be  less  hurtful  than  it  is.  In  our  dis- 
cussion of  the  commodity  rate  of  interest  it  was  shown  that  a 
change  in  the  price  level  had  a  curious  effect  upon  relations 
between  borrower  and  lender ;  if  the  level  of  prices  is  rising, 
the  lender  receives  back  in  real  value  much  less  than  he  loaned  ; 
while  if  the  level  of  prices  is  falling,  the  borrower  is  obliged  to 
return  in  real  value  much  more  than  he  received.  If  prices  are 
falling,  the  borrower,  in  order  to  repay  the  principal,  is  obliged 
to  sell  more  goods  than  he  was  able  to  buy  with  the  money 
when  he  borrowed  it. 

A  farmer  who  borrows  money  when  wheat  is  one  dollar  a 
bushel  is  very  much  discouraged  as  the  price  of  wheat  falls,  for 


1 64  MONEY  AND   CURRENCY 

his  ability  to  pay  his  debt  is  steadily  diminishing.  He  is  injured 
very  much  as  if  he  had  borrowed  one  thousand  bushels  of  wheat 
and  were  required  to  repay  the  loan  in  bushels  of  larger  capacity. 
The  farmer's  case  is  no  different  from  that  of  the  man  who 
borrows  money  or  credit  and  engages  in  manufacturing.  A 
certain  time  must  elapse  before  he  can  turn  the  capital  over  and 
go  into  the  market  with  his  finished  product.  If  in  the  mean- 
time a  change  in  the  price  level  has  occurred  and  the  price  of 
his  product  has  been  lowered,  he  will  take  in  less  money  than 
he  expected,  his  money  profits  will  be  small,  and  his  ability  to 
pay  his  debt  will  be  impaired. 

It  is  incorrect  to  argue  that  this  entrepreneur  and  farmer  are 
both  just  as  well  off  with  less  money  because  the  value  of  money 
has  increased.  They  are  not  as  well  off.  If  prices  fell  uni- 
formly, it  would  be  evident  to  everybody  that  the  purchasing 
power  of  a  dollar  had  increased  and  that  the  fall  of  prices  was 
due  not  to  overproduction  in  this  or  that  industry  but  to  a 
change  in  the  value  of  money,  and  men  might  learn  to  minimize 
the  evil  effects  of  such  a  change.  But  the  fall  is  not  uniform 
and  is  never  ascribed  by  business  men  to  changes  in  the  value 
of  money.  Indeed,  it  is  impossible  to  determine  in  any  given 
case  whether  a  fall  of  price  is  due  to  a  fall  of  value  in  a  partic- 
ular good  or  to  a  rise  in  the  value  of  money.  The  problem  is  so 
intricate  and  so  many  different  influences  are  involved  that  a 
complete  analysis  of  the  causes  in  any  particular  instance  can- 
not easily  be  made. 

Furthermore  a  fall  of  prices,  since  it  strikes  first  this  com- 
modity and  then  that,  always  catches  the  entrepreneur  unpre- 
pared. Inasmuch  as  the  wholesale  prices  are  the  first  affected, 
he  finds  that  his  cost  of  living  is  the  same  as  before  ;  the  prices 
of  some  of  his  raw  materials  have  declined,  but  others  have  not 
felt  the  change  ;  his  laboring  men  insist  upon  the  old  rate  of 
wages.  He  is  obliged  to  sell  at  a  lower  level  of  prices  than  his 
money  costs  of  production  were  based  upon.  It  will  not  cheer 
him  to  tell  him  that  money  has  increased  in  value  and  that  the 
money  he  is  getting  for  his  goods  will  on  the  average  buy  more 
than  the  money  he  paid  out.  All  his  debts  are  money  debts. 


THE  IMPORTANCE  OF   PRICE  165 

A  definite  sum  of  money  is  what  he  needs  in  order  to  keep  on 
his  feet.  The  thing  he  is  interested  in  is  prices,  not  values, 
and  the  inexplicable  turn  which  prices  have  taken  threaten  him 
with  ruin. 

The  psychological  effects  of  a  change  in  the  price  level  are 
of  the  utmost  importance.  Very  few  men  who  engage  in  busi- 
ness or  industry  know  with  certainty  what  their  profits  are 
going  to  be.  The  production  of  wealth  is  always  attended 
with  risk.  Men  assume  this  risk,  sometimes  boldly,  sometimes 
timidly.  If  times  are  considered  good  and  the  prices  of  con- 
spicuous articles  are  rising,  there  is  a  general  feeling  of  confi- 
dence that  business  ventures  can  safely  be  undertaken,  and 
men  engage  freely  in  production.  As  a  result  of  this  confidence 
there  is  a  larger  production  of  wealth  and  the  average  purchas- 
ing power  of  every  member  of  the  community  is  increased. 
The  industrial  millennium  would  be  reached  if  only  this  pro- 
duction could  always  be  wisely  directed ;  that  is  to  say,  if  men 
could  always  gauge  the  wants  of  their  customers,  if  producers 
could  foresee  changes  in  the  popular  tastes  and  vary  their  pro- 
duction accordingly,  for  then  the  condition  commonly  described 
as  overproduction  would  never  ensue.  The  ability  of  people 
to  buy  would  grow  as  the  supply  of  goods  increased.  Unfor- 
tunately, however,  it  is  impossible  to  gauge  changes  in  the 
demand  for  goods,  and  industrial  mistakes  will  doubtless  con- 
tinue to  be  made  and  to  bring  about  the  recurring  periods  of 
prosperity  and  hard  times.  But  of  the  effect  which  the  mental 
condition,  the  hopefulness,  of  a  people  has  upon  their  produc- 
tivity there  can  be  no  doubt.  The  business  man  is  always  dis- 
couraged by  any  loss  which  he  cannot  understand  or  explain,, 
and  his  discouragement  is  communicated  like  a  contagious  dis- 
ease to  others.  Likewise  he  is  greatly  stimulated  by  unexpected 
profits,  and  his  new  confidence  is  also  contagious,  stimulating 
his  neighbors  to  enterprise. 

Here  we  find  perhaps  the  worst  effects  of  a  gradual  fall  of 
prices.  Men  do  not  and  probably  never  will  thoroughly  under- 
stand the  relation  between  money  and  goods.  To  them  money 
is  a  thing  of  fixed  and  changeless  value  ;  goods  are  what  they 


1 66  MONEY  AND   CURRENCY 

make  and  sell,  and  changes  in  prices  are  always  attributed  to 
changes  in  the  demand  for  or  supply  of  goods.  As  a  result, 
when  a  rising  demand  for  money  is  not  met  by  an  increased 
supply,  and  the  prices  of  commodities  here  and  there  begin  to 
weaken,  business  men  are  unable  to  explain  the  phenomenon 
and  are  puzzled  and  distressed.  The  practical  man  usually  at- 
tributes such  a  fall  of  prices  to  excessive  competition  and  over- 
production. During  the  last  twenty-five  years  of  the  nineteenth 
century  these  two  phrases  were  in  every  one's  mouth  in  expla- 
nation of  the  heavy  prices  and  vanishing  profits  of  that  period  ; 
and  many  a  young  man  was  advised  to  keep  out  of  business  and 
enter  one  of  the  professions  on  the  ground  that  business  was 
"  overdone  " ! 1 

EFFECTS  OF  CHANGES  IN  THE  PRICE  LEVEL 

no.  An  appreciating  standard  depresses  industry  and  causes 
a  lessening  of  the  demand  for  capital,  but  it  increases  the  pur- 
chasing power  of  bonds,  annuities,  wages,  and  salaries,  and  so 
apparently  benefits  both  the  capitalist  and  the  laboring  classes. 
We  have  already  described  its  effect  upon  industry  and  upon 
the  demand  for  capital.  The  laboring  man  seems  to  be  benefited 
by  a  fall  of  prices  for  the  reason  that  wages  are  the  last  thing 
to  be  affected  in  the  readjustment  of  prices  caused  by  an  appre- 
ciation of  the  gold  standard.  A  general  fall  of  prices,  unless 
the  efficiency  of  labor  greatly  increases  at  the  same  time,  must 
sooner  or  later  bring  about  a  corresponding  decline  in  the  rate 
of  wages  ;  but  this  decline,  experience  shows,  does  not  come 
until  after  the  change  in  the  value  of  the  standard  has  affected 
the  prices  of  most  goods.  It  would  appear,  therefore,  that  the 
laboring  man,  for  a  time  at  least,  gets  the  old  money  rate  of 
wages  and  is  able  'to  buy  more  comforts  and  luxuries  than 
before  ;  in  other  words,  he  is  earning  as  many  dollars  as  for- 
merly and  each  dollar  exchanges  for  more  goods. 

1  A  successful  merchant  in  Chicago,  who  was  a  devout  church  member,  told  the 
writer  in  1880  that  he  intended  to  send  his  two  boys  to  college  and  make  lawyers 
or  doctors  of  them.  "  Competition  is  so  fierce  nowadays,"  he  said,  "  that  a  busi- 
ness man  can't  be  a  Christian  and  succeed."  The  boys,  however,  chose  the 
father's  business  and  since  1897  have  made  their  fortunes. 


THE  IMPORTANCE  OF  PRICE  167 

The  capitalist  class  seem  to  be  benefited  by  a  fall  of  prices  in 
so  far  as  their  investments  are  in  bonds,  mortgages,  leaseholds, 
and  annuities,  which  yield  a  fixed  money  income.  Also  as 
lenders  of  capital  for  short  periods  they  appear  to  be  gainers  ; 
although  the  money  rate  of  interest  tends  to  decline,  yet  the 
commodity  rate  is  high  and  the  purchasing  power  or  value  of 
the  lender's  principal  is  steadily  increasing.  But  as  "owner  of 
goods  or  property  the  capitalist  derives  no  benefit  from  the 
shrinkage  of  prices ;  to  the  landlord  as  to  the  business  man, 
the  shrinkage  of  prices  seems  a  shrinkage  of  values. 

If  we  analyze  the  benefits  received  by  the  lender  of  capital, 
the  bondholder,  the  annuitant,  and  the  laboring  man,  we  shall 
find  that  they  are  more  apparent  than  real.  The  benefit  derived 
from  a  fall  of  prices  by  the  owner  of  bonds,  mortgages,  and 
leaseholds  is  short-lived.  The  prices  of  bonds  usually  rise  dur- 
ing a  period  of  falling  prices,  there  being  an  increased  demand 
for  them,  not  only  from  men  who  had  formerly  been  bond  pur- 
chasers, but  also  from  men  who  had  formerly  been  engaged  in 
business.  As  the  returns  from  industry  decline  men  begin  to 
withdraw  from  business  and  seek  to  invest  their  capital  in  some 
fixed  form.  Consequently  the  prices  of  bonds  tend  to  rise,  and 
the  capitalist  is  obliged  to  invest  his  new  capital  and  reinvest 
his  old  at  disappointing  rates  of  income.  But  the  capitalist 
class  are  owners  of  more  than  bonds  and  leaseholds  ;  they  are 
the  owners  of  the  capital  stocks  of  railroads  and  industrial  cor- 
porations, and  the  dividends  on  these  always  fall  off  during  a 
period  of  declining  prices.1  The  rewards  of  capital  come  from 
industry,  and  any  cause  depressing  that  is  certain  sooner  or 
later  to  lessen  the  income  of  the  capitalist  class. 

In  like  manner  we  find  that  the  advantages  of  falling  prices 
to  the  wage  earner  or  salaried  man  are  more  apparent  than 

1  Between  1880  and  1897  over  75  per  cent  of  the  railroads  in  the  United  States 
passed  into  the  hands  of  receivers,  the  stock  in  many  cases  being  wiped  out.  This 
era  of  corporation  bankruptcy,  which  cost  capitalists  or  investors  many  hundred 
million  dollars,  was  not  altogether  the  product  of  excessive  capitalization,  as  is  often 
taken  for  granted.  During  that  period  the  general  price  level  declined  some  40 
per  cent.  Railroads  were  forced  to  reduce  their  rates,  and  their  money  incomes 
declined.  Their  money  indebtedness  had  been  fixed  by  issues  of  long-time  bonds 
and  could  not  be  correspondingly  reduced. 


1 68  MONEY  AND   CURRENCY 

real.  Wages  and  salaries,  like  the  rewards  of  capital,  are  paid 
out  of  the  fruits  of  industry.  If  these  are  declining,  the  total 
sum  paid  in  wages  and  salaries  must  decline.  There  can  be  no 
escape  from  this  conclusion.  It  would  follow,  therefore,  that  a 
fall  of  prices  benefits  only  those  who  continue  to  receive  wages 
and  salaries  after  the  fall  has  begun.  During  such  a  period,  as 
we  have  seen,  industrial  establishments  curtail  their  operations 
and  discharge  part  of  their  force,  and  business  houses  reduce 
their  expenses  by  cutting  down  the  salary  list  as  much  as  pos- 
sible. The  wage  rate  is  not  at  first  lowered,  but  the  number 
of  men  who  have  employment  is  reduced.  Viewing  the  salaried 
and  wage-earning  class  as  a  whole,  therefore,  we  cannot  say 
that  a  general  fall  of  prices  is  an  advantage.  It  helps  only  the 
favored  few  who  are  able  to  keep  their  positions. 

The  professions  are  variously  affected  by  a  fall  of  prices.  It 
may  be  regarded  as  an  advantage  to  teachers  in  the  public 
schools  and  in  colleges,  for  their  salaries  come  out  of  taxes 
and  invested  funds  and  their  tenure  of  office  is  comparatively 
secure.  The  purchasing  power  of  the  preacher's  salary  is  also 
increased,  so  that  he  is  better  off.  Apparently  the  position  of 
the  doctor  and  lawyer  is  improved,  for  their  money  fees  are 
not  immediately  affected  by  any  change  in  the  value  of  money. 
It  should  be  noted,  however,  that  the  doctor's  clientele  will 
have  less  money  to  spend  and  so  will  probably  call  less  fre- 
quently for  his  services,  and  that  his  charity  list  will  be  liable  to 
increase.  Lawyers'  fees  will  be  more  difficult  to  collect ;  yet  the 
lawyer  is  fortunate  in  that  his  services  continue  to  be  in  demand 
even  when  times  are  hard.  As  for  the  preacher,  even  he  is 
fortunate  if  he  escape  loss,  for  contributions  for  support  of  the 
churches  are  obtained  with  increasing  difficulty.  Furthermore 
among  all  the  professions  competition  tends  to  become  greater 
because  the  certainty  of  income  they  seem  to  promise  is  im- 
mensely attractive  in  a  period  of  depression. 

in.  A  depreciating  standard  seems  to  work  injury  to  all 
creditor  classes,  especially  the  bondholder  and  annuitant,  and 
to  the  salaried  and  wage-earning  classes,  while  it  apparently 
benefits  the  debtor  and  entrepreneur.  A  steady  rise  of  prices, 


THE  IMPORTANCE  OF   PRICE  169 

unless  wages  and  salaries  advance  at  equal  pace,  evidently 
lessens  the  real  value  of  wages  and  salaries  and  makes  the 
income  from  bonds  and  annuities  of  less  and  less  consequence 
to  the  recipient.  A  little  analysis,  however,  will  show  that 
this  hurtful  effect  of  rising  prices  is  more  apparent  than  real. 
As  has  been  shown,  a  gradual  rise  of  prices  tends  to  be 
accompanied  by  a  rise  of  the  rate  of  interest  and  by  increased 
industrial  activity.  While  salaries  and  wages  do  not  rise  at 
an  equal  pace  with  prices,  nevertheless  there  is  an  increased 
demand  for  labor,  more  men  have  employment,  and  increasing 
quantities  of  money  and  credit  are  distributed  in  wages  and 
salaries.  The  production  of  wealth  is  increased  and  a  greater 
share  goes  to  labor  than  formerly.  There  are  undoubtedly 
many  cases  where  individual  members  of  the  wage-earning 
class  suffer  loss  through  the  failure  of  their  incomes  to  increase 
as  prices  rise,  but  the  class  as  a  whole  is  benefited,  for  the 
number  of  unemployed  is  immediately  reduced. 

To  the  owner  of  capital  who  is  able  to  change  his  investments 
and  take  advantage  of  new  conditions  it  is  not  at  all  certain 
that  a  depreciation  of  money  brings  any  loss.  Since  the  pro- 
duction of  wealth  is  stimulated,  the  share  going  to  the  owner 
of  capital  should  surely  increase.  As  the  owner  of  bonds,  he 
certainly  seems  at  first  to  suffer  loss,  for  these  usually  fall  in 
price  at  the  outset.  The  rising  rate  of  interest  and  the  brilliant 
prospects  of  industrial  enterprise  make  bonds,  with  their  fixed 
rate  of  income,  less  attractive  than  stocks,  which  rise  in  price 
at  such  a  time  and  upon  which  the  rates  of  dividend  rise.  The 
prices  of  bonds,  therefore,  instead  of  advancing  on  account  of 
an  increasing  money  supply,  usually  tend  downward.  While  the 
bondholder  must  sell  at  some  sacrifice,  he  finds  full  compen- 
sation in  the  rising  dividends  from  stocks  and  in  the  higher 
rate  of  interest  on  his  loans.  He  must,  like  all  other  men, 
beware  of  the  evil  day  when,  confidence  having  become  rash- 
ness, men  scatter  the  seeds  of  capital  over  stony  ground  and 
seek  to  mortgage  an  imaginary  crop.  That  day  of  panic,  born 
of  excessive  speculation  and  of  misdirected  effort,  cannot  be 
wholly  charged  up  to  the  depreciation  of  money ;  it  is  quite  as 


170  MONEY  AND   CURRENCY 

certain  to  come  when  an  appreciation  of  the  standard  is  lower- 
ing the  price  level,  and  would  doubtless  be  on  the  calendar 
of  industry  even  though  men  used  an  ideal  money  incapable  of 
great  appreciation  or  depreciation. 

As  an  owner  of  real  estate  the  capitalist  is  at  first  hurt  by  a 
depreciation  of  money,  for  the  price  of  real  estate  is  slow  to 
respond  to  changes  in  the  value  of  money.  Instead  of  ad- 
vancing in  price  on  account  of  a  relative  increase  in  the  supply 
of  money,  real  estate  not  infrequently  suffers  a  decline ;  some- 
times, indeed,  it  advances  in  price  while  general  prices  are 
falling,  and  then  takes  its  turn  in  declining  after  prices  have 
begun  to  rise.  This  is  a  peculiarity  of  prices  which  is  not  diffi- 
cult to  understand.  Income  from  real  estate  is  often  fixed  for 
long  periods  by  leases  and  so  cannot  be  quickly  changed  to  corre- 
spond with  changes  in  the  returns  from  industry.  An  upward 
tendency  is  very  quickly  given  to  rents  in  the  cities,  but  the 
rents  of  farms  and  residences  are  slow  to  rise.  A  man  who  is 
getting  5  per  cent  for  an  investment  in  real  estate  congratu- 
lates himself  when  times  are  hard  and  business  failures  are 
numerous,  but  when  times  change  and  he  sees  his  friends  mak- 
ing 15  or  20  per  cent  in  business,  his  5  per  cent  investment 
in  real  estate  does  not  satisfy  him  and  he  is  anxious  to  sell. 

To  people  entirely  dependent  on  fixed  incomes  a  depreciation 
of  money  is  undoubtedly  a  serious  matter.  All  incomes  from 
real  estate,  leaseholds,  annuities,  and  pensions  undoubtedly 
suffer,  and  there  is  little  chance  of  recompense.  During  the 
great  rise  of  prices  in  the  seventeenth  century,  consequent 
upon  the  production  of  precious  metals  in  the  New  World,  many 
thousand  families  in  Europe  were  severely  crippled  by  the 
decline  in  the  purchasing  power  of  their  incomes.  Adam  Smith 
estimated  that  prices  rose  between  200  and  300  per  cent 
between  the  middle  of  the  sixteenth  and  the  end  of  the  seven- 
teenth century.  This  rise  of  prices  was  the  cause  of  much  pri- 
vation and  loss  among  all  those  families  whose  incomes  had 
been  fixed  by  contracts  extending  over  long  periods. 

At  the  same  time  these  two  centuries  were  the  most  remark- 
able in  the  history  of  the  civilized  world.  It  was  the  period 


THE  IMPORTANCE  OF   PRICE  171 

in  which  modern  industrial  civilization  was  born,  and  the  pnx 
duction  of  wealth  increased  at  a  pace  unprecedented.  Some 
writers  even  attribute  the  great  stimulus  given  to  industry 
during  these  centuries  to  the  influx  of  precious  metals  from  the 
New  World.  We  must  beware  of  attributing  any  important 
event  in  history  to  a  single  cause,  yet  the  student  of  money 
who  has  considered  in  all  its  bearings  the  relation  of  money  to 
industry  and  to  human  welfare  can  be  forgiven  for  inclining 
to  the  belief  that  the  stagnation  of  the  Middle  Ages  was  due  in 
some  measure  to  the  scarcity  of  the  precious  metals,  and  the 
prosperity  of  the  succeeding  centuries  to  their  abundance. 
Price  is  so  important  a  concept  and  plays  so  large  a  part  in 
the  affairs  of  men  that  any  derangement  or  maladjustment  of 
prices,  due  to  continuous  breaks  in  the  relation  between  the 
demand  for  and  supply  of  money,  cannot  fail  to  have  an  impor- 
tant effect  upon  the  material  welfare  of  man. 

INDUSTRY  THE  IMPORTANT  CONSIDERATION 

112.  In  discussing  the  stability  of  the  standard  most  writers 
have  assumed  that  its  chief  importance  grows  out  of  the  pos- 
sible injustice  to  the  debtor  or  creditor  classes,  wrought  by 
appreciation  or  depreciation.  As  we  have  seen,  a  fall  of  prices 
imposes  an  extra  burden  upon  the  debtor,  while  a  rise  of 
prices  robs  the  creditor  of  real  value.  These  are  undoubtedly 
important  considerations,  but  they  are  not  the  most  important. 
The  worst  effects  of  a  change  in  the  value  of  the  standard  are 
in  the  field  of  production.  A  depreciating  standard  tends  to  an 
overstimulated  production  and  may  lead  to  an  unwise  use  of 
capital  and  labor.  An  appreciating  standard,  on  the  other  hand, 
tends  to  discourage  the  production  of  wealth  and  so  to  bring 
hardship  upon  all.  It  is  this  effect  upon  production  which 
makes  the  question  of  price  an  all-important  one.  Money  is 
much  more  than  a  mere  go-between  or  messenger,  and  cannot 
be  left  out  of  account  when  considering  the  forces  that  direct 
the  productive  efforts  of  men,  for  changes  in  its  value  are 
universal  in  their  effect. 


172  MONEY  AND   CURRENCY 

Imagine  the  confusion  that  would  result  if  an  average  modi- 
fication of  the  English  language,  amounting  to  5  per  cent  of 
its  vocabulary,  should  take  place  during  a  certain  year,  the 
changes  not  being  the  same  in  degree  in  all  families  and  all 
communities.  One  might  still  call  a  horse  a  horse,  while 
another  knew  it  as  a  "  bucephalus."  A  man  might  try  to  buy 
shoes  of  a  storekeeper  who  knew  them  only  as  "  footings." 
Even  if  the  change  in  the  language  were  uniform,  all  our 
written  literature  would  gradually  become  obsolete  and  unin- 
telligible ;  but  if  the  change  were  not  uniform,  the  smooth  and 
easy  exchange  of  everyday  ideas  would  surfer  amazingly.  Just 
as  language  is  a  medium  of  exchange  of  ideas,  so  is  money  a 
medium  of  exchange  of  goods  and  services.  Money  performs 
its  work  by  virtue  of  its  exchangeability,  and  like  language  is 
in  common  use.  Universal  aphasia  would  have  very  much  the 
same  effect  upon  conversation  that  fluctuations  in  the  value  of 
money  have  upon  the  production  and  exchange  of  wealth. 

DIFFERENT  STANDARDS  CONSIDERED 

113.  In  recognition  of  the  fact  that  changes  in  the  price 
level  alter  the  relation  between  debtor  and  creditor,  economists 
have  discussed  somewhat  the  question  of  an  ideal  standard  of 
deferred  payments.  The  subject  is  mainly  of  theoretical  inter- 
est at  present,  for  there  is  little  likelihood  that  practical  men 
could  be  persuaded  to  adopt  an  ideal  standard,  even  if  one  could 
be  devised.  As  yet,  however,  there  is  no  agreement  among  the 
theorists.  It  is  agreed  that  stability  is  essential  to  an  ideal 
standard,  but  in  respect  to  what  should  this  stability  exist? 
Upon  this  point  there  has  been  much  discussion.  Let  us 
consider  briefly  some  of  the  different  views. 

The  oldest  plan  to  preserve  a  just  relationship  between 
debtor  and  creditor,  despite  fluctuations  in  the  value  of  money, 
is  known  as  the  multiple  or  tabular  standard.  This  assumes 
that  an  ideal  standard  should  possess  stability  with  respect  to 
goods.  A  man  who  lends  money  parts  with  a  certain  quantity 
of  purchasing  power,  that  is,  he  surrenders  command  over  a 


THE  IMPORTANCE  OF  PRICE  173 

certain  quantity  of  goods.  The  multiple  standard  provides  that 
when  the  debt  is  paid  he  shall  receive  as  principal  the  same 
quantity  of  purchasing  power,  and  so  be  in  respect  to  goods  as 
well  off  as  when  he  made  the  loan.  In  order  that  this  result 
may  be  achieved,  it  is  proposed  that  a  government  commission 
shall  make  weekly  or  monthly  estimates  of  changes  in  general 
prices,  and  that  the  amount  of  money  necessary  to  cancel  a  loan 
shall  vary  as  these  estimates  vary.  The  commission  would 
select  a  hundred  or  more  representative  commodities  and  from 
the  prices  of  these  compute  an  official  index  number,  changes 
in  which  would  be  assumed  to  reflect  changes  in  the  value  of 
money.  Suppose  that  during  the  life  of  a  certain  loan  this 
index  number  rose  from  100  to  no;  this  would  mean  that 
$110  at  the  end  of  the  period  was  worth  in  goods  no  more 
than  $100  had  been  worth  at  the  beginning,  and  hence  that 
the  debtor  should  repay  as  principal  a  sum  of  money  10  per 
cent  larger  than  the  sum  he  borrowed.  On  the  other  hand,  if 
during  the  period  the  index  number  of  prices  fell  from  100  to 
90,  an  increase  in  the  value  of  money  would  be  shown  and  the 
debtor  would  repay  in  money  10  per  cent  less  than  he  had 
received. 

Some  writers  have  held  that  an  ideal  standard  of  deferred 
payments  should  be  based  upon  utility,  since  utility,  the  power 
to  satisfy  human  wants,  is  the  source  of  all  value.  No  practi- 
cable plan  for  the  adoption  of  a  utility  standard  has  been  pre- 
sented, but  it  is  held  theoretically  that  exact  justice  between 
debtor  and  creditor  cannot  be  obtained  except  under  a  standard 
based  on  utilities  rather  than  on  goods.  According  to  this 
view  an  ideal  monetary  unit  would  always  represent  the  same 
amount  of  utility  or  satisfaction.  From  generation  to  gener- 
ation the  standard  of  life  has  been  rising.  At  the  present 
time  men  do  not  get  the  same  satisfaction  out  of  a  tallow 
candle  that  their  grandfathers  did.  Candles,  therefore,  ought 
to  be  lower  in  price.  A  carpet  means  much  less  to  the  average 
American  family  than  it  did  fifty  years  ago.  So  does  a  piano, 
a  stove,  or  a  pair  of  shoes,  or  a  rocking-chair.  If  changes  in 
the  value  of  money  are  to  record  changes  in  the  utilities  of 


174  MONEY  AND  CURRENCY 

goods,  then  the  prices  of  goods  ought  to  fall  as  their  relative 
importance  to  men  decreases. 

A  third  standard  is  known  as  the  labor  standard.  Since  all 
goods  are  the  product  of  human  labor,  it  is  held  that  a  perfect 
money  is  one  that  will  always  buy  the  same  amount  of  labor. 
According  to  this  standard  the  money  wages  of  labor  would 
always  be  on  the  average  the  same,  but  as  civilization  advanced 
and  machinery  made  labor  more  productive  there  should  be  a 
steady  fall  of  prices  due  to  the  increasing  value  of  human  labor. 
This  fall  of  prices,  it  is  held,  would  injure  nobody,  for  each  man 
through  the  fall  of  prices  would  get  the  benefit  of  his  increased 
productivity  even  though  his  money  wages  did  not  increase. 

1 14.  The  standard  now  in  use  throughout  the  civilized  world 
is  the  commodity  standard.  Gold  and  silver  are  the  world's 
money  metals,  and  in  nearly  all  countries  one  or  the  other  is 
used  as  the  standard  of  deferred  payments.  Under  the  com- 
modity standard  the  borrower  returns  the  same  commodity,  or 
the  same  quantity  of  it,  which  he  borrowed.  This  standard,  as 
we  have  seen,  is  far  from  ideal.  If  a  man  borrows  a  thousand 
dollars  when  prices  are  high  and  makes  repayment  when  prices 
are  low,  he  gives  the  lender  a  greater  command  over  goods 
than  he  possessed  when  he  parted  with  his  money.  And  unless 
the  total  sum  of  utilities  is  greatly  increased,  he  gives  the 
lender  command  over  a  greater  number  of  utilities  —  a  greater 
amount  of  pleasure  or  satisfaction  —  than  he  possessed  when  he 
made  the  loan.  If  wages  meantime  have  fallen,  he  gives  the 
lender  command  over  a  greater  amount  of  human  effort. 

The  subject  of  an  ideal  standard  has  had  for  some  time  and 
is  likely  always  to  have  a  theoretic  interest.  Whatever  may  be 
thought  of  the  justice  or  injustice  of  the  commodity  standard, 
it  is  the  one  which  the  world  has  unconsciously  adopted,  and 
no  amount  of  theorizing  about  its  defects  can  bring  about  an 
immediate  change.  Speculation  about  the  desirability  of  a 
utility  standard  or  a  labor  standard  is  likely  to  be  as  futile  in 
the  field  of  money  as  speculation  about  Volapuk  has  been  in 
the  field  of  language.  The  English  language  is  full  of  imper- 
fections familiar  to  every  scholar.  Countless  improvements  in 


THE  IMPORTANCE  OF   PRICE  175 

construction,  vocabulary,  and  orthography  have  been  suggested, 
but  there  is  no  power  strong  enough  to  make  the  people  adopt 
them.  Nor  can  the  character  of  money  be  changed  as  a  result 
of  the  discovery  of  imperfections  in  the  money  that  is  now  in 
general  use. 

115.  The  general  use  of  the  multiple  standard  in  the  liquida- 
tion of  loans  would  save  the  producer  from  some  of  the  evil 
effects  of  rising  and  falling  prices.  Rising  prices  would  increase 
his  money  profits,  but  his  money  indebtedness  would  increase 
at  the  same  time ;  and  so  the  artificial  stimulus  given  to  indus- 
try by  rising  prices  would  be  counteracted  in  some  measure.  It 
would  not  be  altogether  nullified,  however,  for  the  profits  made 
by  men  employing  their  own  capital  would  not  be  affected.  In 
the  case  of  falling  prices  the  multiple  standard  would  save  the 
producer  from  considerable  discouragement,  for  as  the  prices  of 
his  goods  fell,  and  his  profits  declined,  the  amount  of  his  money 
indebtedness  would  also  grow  less.  Here  also  the  partial  use 
of  this  tabular  standard  would  not  destroy  all  of  the  evil  effects 
of  an  appreciating  standard,  for  the  men  doing  business  on 
their  own  capital  would  get  no  relief. 

This  device  is  practicable,  but  we  may  well  doubt  its  general 
adoption.  The  utmost  we  can  look  for  is  the  creation  by  Con- 
gress of  a  statistical  commission  for  the  daily  or  weekly  calcu- 
lation and  publication  of  an  official  index  number.  If  a  law 
were  passed  providing  for  the  publication  of  such  a  number  and 
enforcing  its  use  in  the  case  of  all  credit  instruments  where  it 
had  been  agreed  upon  by  both  lender  and  borrower,  it  is  possi- 
ble that  the  merits  of  the  multiple  standard  might  bring  it  into 
favor,  particularly  in  the  case  of  long  leases  and  mortgages.  It 
is  doubtful,  however,  if  banks  and  business  men  in  general 
would  take  time  to  make  the  necessary  calculations.  Men  are 
not  yet  awake  to  the  importance  of  guarding  themselves  in 
ordinary  business  transactions  against  losses  from  subtle  and 
unforeseen  changes  in  the  value  of  money.  When  prices  are 
rising  men  are  usually  too  busy  making  money  to  be  concerned 
about  any  question  of  justice  as  between  debtor  and  creditor; 
the  borrower  is  complacent  over  his  unexpected  profits,  and  the 


176  MONEY  AND   CURRENCY 

lender  over  the  rising  rate  of  interest.  On  the  other  hand, 
when  the  price  level  is  declining  all  the  influence  of  the  so- 
called  "  moneyed  "  classes  is  opposed  to  any  arbitrary  scaling 
of  debts,  while  borrowers  are  prone  to  view  with  satisfaction 
the  falling  rate  of  interest.1 

LITERATURE 

C.  M.  WALSH,  The  Fundamental  Problem  in  Monetary  Science  ;  L.  L. 
PRICE,  Money  and  its  Relation  to  Prices;  ELIJAH  HELM,  The  Joint 
Standard,  chaps,  vi-xiii  ;  ROBERT  GIFFEN,  Essays  in  Finance,  second 
series  ;  J.  S.  NICHOLSON,  Money  and  Monetary  Problems;  F.  A.  WALKER, 
International  Bimetallism;  H.  J.  DAVENPORT,  Outlines  of  Economic 
Theory  (New  York,  1896);  L.  DARWIN,  Bimetallism  (London,  1898); 
JEVONS,  Investigations,  etc.;  ALEXANDER  DEL  MAR,  Money  and  Civiliza- 
tion; also  The  Science  of  Money ;  E.  BENJAMIN  ANDREWS,  An  Honest  Dol- 
lar; SMART,  Studies  in  Economics,  chaps,  v  and  vii ;  M,  CHEVALIER,  On  the 
Probable  Fall  in  the  Value  of  Gold  (New  York,  1859);  DAVID  KINLEY, 
Money,  chap,  xiii;  R.  H.  PATTERSON,  The  New  Golden  Age  (London,  1882). 
The  advocates  of  bimetallism  and  of  the  free  coinage  of  silver  have  found 
their  most  effective  argument  in  the  evil  effects  of  falling  prices ;  see  litera- 
ture at  end  of  Chapters  XI  and  XII. 

1  The  use  of  the  phrase  "commodity  standard"  in  this  chapter  is  criticised  by 
Professor  A.  Piatt  Andrew  (Political  Science  Quarterly,  December,  1906)  on  the 
ground  that  in  economic  literature  it  "  has  come  to  refer  to  a  currency  standard 
that  has  a  stable  value  in  exchange  for  commodities."  In  most  books,  as  in 
this,  such  a  standard  is  designated  the  "  multiple  standard." 

When  a  single  commodity  like  gold  is  freely  coined,  the  values  of  the  com- 
modity and  of  money  are  practically  the  same.  The  author,  having  found  in  the 
books  no  phrase  describing  generically  such  a  standard,  calls  it  the  "  commodity 
standard."  Possibly  "  single  commodity  standard  "  would  be  better. 


CHAPTER  IX 
COMMODITY  OR  METAL  MONEY 

1 1 6.  Gold  and  silver  the  only  metals  now  used  as  commodity  money.  117.  The 
free  coinage  of  a  metal  is  essential  to  its  use  as  commodity  money.  "  Seign- 
iorage" and  "brassage."  118.  When  the  free  and  gratuitous  coinage  of  a  metal  is 
permitted  an  ounce  of  the  metal  coined  can  never  be  worth  much  more  or  less 
than  an  ounce  uncoined.  119.  The  value  of  commodity  money  (gold  in  the  United 
States)  is  the  product  of  a  double  demand,  —  the  demand  for  it  for  use  as  money 
and  the  demand  for  it  in  the  arts.  120.  Error  of  statement  that  the  value  of 
money  in  the  United  States  is  derived  from  the  value  of  gold.  121.  The  true 
relation  between  gold  and  money  is  obscured  by  the  fact  that  gold  has  no  price. 
122.  Free  coinage  gives  to  a  metal  practically  all  the  utilities  of  money.  123.  The 
free  coinage  of  a  metal  increases  the  demand  for  it.  124.  The  statistics  of  coinage 
do  not  indicate  the  full  effect  exerted  upon  the  value  of  gold  by  the  monetary 
demand.  As  gold  rises  in  value  a  given  quantity  satisfies  a  larger  monetary 
demand.  125.  A  seigniorage  charge  raises  the  value  of  the  coin  above  that  of  the 
bullion.  Under  a  system  of  free  coinage  the  imposition"  of  a  seigniorage  tax,  even 
though  the  seigniorage  is  coined,  will  not  lead  to  a  rise  of  prices.  126.  A  seignior- 
age of  100  per  cent  would  yield  paper  money  regulated  in  value  by  the  value  of 
gold.  127.  The  effects  of  seigniorage  illustrated  in  France.  128.  The  advantages 
and  disadvantages  of  seigniorage.  129.  The  principles  governing  the  use  of  com- 
modity money  apply  to  silver  as  well  as  to  gold.  The  silver  standard  in  Mexico. 
130.  Gresham's  law  :  Whenever  the  bullion  in  the  coin  is  worth  more  as  bullion 
than  as  money,  the  coin  will  either  be  melted  for  use  in  the  arts  or  be  exported  as 
bullion  to  a  foreign  country.  131.  The  supply  of  commodity  money  is  regulated 
automatically  through  the  medium  of  price  and  the  rate  of  interest.  132.  A  silver 
price  level  is  unrelated  to  a  gold  price  level.  133.  Credit  money  is  often  coined 
from  metal.  134.  The  law  of  legal  tender  as  applied  to  gold  and  silver. 

1 1 6.  As  explained  briefly  in  Chapter  II,  the  world  has  had 
experience  with  two  kinds  of  money,  —  commodity  money  and 
fiat  money.  The  difference  between  these  two  is  not  funda- 
mental ;  the  nature  and  principles  of  money,  the  laws  govern- 
ing its  value  and  use,  are  the  same  whether  money  is  made  out 
of  a  valuable  material  like  gold  or  out  of  a  comparatively  value- 
less substance  like  paper.  The  difference  between  fiat  and 
commodity  money  is  found  only  in  the  method  whereby  the 
supply  is  regulated.  In  the  case  of  commodity  money,  a  certain 

177 


178  MONEY  AND   CURRENCY 

commodity  being  freely  used  as  money,  the  supply  is  regulated 
automatically,  being  subject  to  conditions  affecting  the  supply 
of  the  commodity  used;  whereas  the  supply  of  fiat  money  is 
regulated  artificially. 

Many  different  articles  have  served  as  commodity  money. 
Tobacco  was  at  one  time  money  in  Virginia.  Wampum  served 
the  Indian  and  the  early  settlers  of  this  country  as  money. 
Even  copper  and  iron  were  once  used  as  money.  The  Greeks 
of  the  heroic  age  are  supposed  to  have  used  cattle  as  money, 
but  this  is  probably  an  error.  The  ancient  Greeks  used  iron 
and  copper  as  money  or  as  a  medium  of  exchange,  and  employed 
cattle  merely  as  a  money  of  account,  a  steer  being  valued  at  a 
definite  amount  of  the  common  medium.  This  use  of  the  steer 
by  the  Greeks  was  similar  to  the  present  use  of  the  guinea  in 
England  or  to  the  use  of  the  old  York  shilling  in  some  parts  of 
this  country  during  the  first  half  of  the  nineteenth  century. 
There  is  no  coin  known  as  the  guinea,  but  English  shop- 
keepers find  it  a  convenient  name  for  twenty-one  shillings.  In 
the  same  way  the  ancient  Greeks  doubtless  found  it  convenient 
to  express  large  values  in  terms  of  cattle  instead  of  in  large 
sums  of  their  clumsy  coin. 

At  the  present  time  metal  money  consisting  either  of  gold 
or  of  silver  is  the  only  form  of  commodity  money  in  the  civi- 
lized world.  These  metals  have  been  found  by  experience  to 
serve  the  purpose  better  than  other  metals  or  than  any  other 
commodity.  Their  beauty,  their  indestructibility,  their  porta- 
bility, their  great  value  in  small  bulk,  first  made  them  univer- 
sally desired  and  so  gradually  led  to  their  use  as  a  medium  of 
exchange  and  standard  of  prices.  On  account  of  their  homo- 
geneity they  are  easily  tested  and  are  readily  converted  into 
coins  of  convenient  sizes. 

Gold  and  silver  are  supposed,  on  account  of  their  relative  scar- 
city and  high  cost  of  production,  to  possess  greater  stability  of 
value  than  most  other  commodities,  but  it  is  doubtful  if  they 
possessed  this  superiority  before  they  were  used  as  money 
metals.  Their  present  comparative  stability  is  due  to  the  fact 
that  the  mass  of  each  metal  in  existence  in  the  form  of  coin 


COMMODITY    OR   METAL   MONEY  179 

and  bullion  is  so  large  that  the  relatively  small  annual  incre- 
ment from  the  earth's  gold  and  silver  mines  does  not  greatly 
affect  its  value.  If  silver  and  gold  had  not  for  many  centu- 
ries been  used  as  money,  no  large  mass  of  either  metal  would 
exist  in  a  form  available  for  various  uses ;  the  output  of  each 
year  would  have  been  promptly  devoted  to  artistic  and  indus- 
trial uses,  and  the  value  of  each  would  fluctuate  from  year  to 
year,  responding  sensitively  to  slight  changes  in  the  quantity 
produced. 

117.  The  free  coinage  of  a  metal  is  essential  to  its  use  as 
commodity  money.  By  the  free  coinage  of  a  metal  is  meant  its 
free  use  as  money  by  all  persons,  the  government  converting 
into  coin  all  the  metal  brought  to  it.  The  monetary  unit  in  the 
United  States,  for  example,  is  the  dollar,  a  gold  coin  containing 
25.8  grains  of  standard  gold.1  Any  person  owning  gold  may 
have  it  coined  at  a  United  States  mint. 

The  coinage  of  gold  in  this  country  is  not  only  free,  i.e. 
open  to  all  persons,  but  is  also  gratuitous,  the  expense  of  mint- 
age being  borne  by  the  government.  But  a  person  bringing  gold 
to  the  mint  must  pay  for  the  necessary  alloy,  for  the  refinement 
of  the  metal,  and  for  its  conversion  into  bullion,  which  is  the 
technical  name  for  standard  gold  ready  for  coinage.  These 
expenses  are  sometimes  known  as  the  " brassage"  charge. 

In  England  and  the  United  States  brassage  is  the  only  expense 
paid  by  private  persons,  but  in  most  other  countries  a  further 
charge  known  as  "  seigniorage  "  (the  seignior's  or  lord's  share) 
is  exacted.  In  France,  for  example,  the  free  coinage  of  gold  is 
permitted,  but  the  coinage  is  not  gratuitous,  for  out  of  every 
3100  francs  coined  the  government  retains  7^  francs  as  seign- 
iorage. In  the  United  States,2  if  a  man  take  standard  gold  to 

1  The  gold  dollar,  having  proved  too  small  for  convenient  use,  is  no  longer 
minted.    Gold  is  coined  into  two-and-a-half-,  five-,  ten-,  and  twenty-dollar  pieces. 

2  Freedom  of  coinage  in  the  United  States  with  respect  to  both  gold  and  silver 
was  granted  in  the  law  of  1792,  as  follows:    "  That  it  shall  be  lawful  for  any  per- 
son or  persons  to  bring  to  the  said  mint  gold  and  silver  bullion  in  order  to  their 
being  coined  ;  and  that  the  bullion  so  brought  shall  be  there  assayed  and  coined 
as  speedily  as  may  be  after  the  receipt  thereof,  and  that  free  of  expense  to  the 
person  or  persons  by  whom  the  same  shall  have  been  brought.    And  as  soon  as 


l8o  MONEY  AND   CURRENCY 

the  mint,  he  is  entitled  to  the  same  weight  of  gold  in  the  shape 
of  coin  ;  but  in  France  and  several  other  countries,  on  account 
of  seigniorage  charges,  the  coins  received  weigh  less  than  the 
bullion  that  is  delivered  to  the  mint. 

RELATION  BETWEEN  COIN  AND  BULLION 

1 1 8.  When  the  free  and  gratuitous  coinage  of  a  metal  is  per- 
mitted, an  ounce  of  the  metal  coined  can  never  be  worth  much 
more  or  less  than  an  ounce  uncoined.    An  equivalence  of  value 
between  coined  and  uncoined  bullion  is  established  by  freedom 
of  coinage.    Thus  free  coinage  of  a  metal  practically  makes  the 
metal  itself  money,  the  metal  varying  in  value  with  every  fluc- 
tuation in  the  value  of  the  coins  made  out  of  it.    In  the  United 
States,  on  account  of  the  free  and  gratuitous  interchangeability 
between  gold  bullion  and  gold  coin,  gold  bullion  is  regarded  as 
practically  the  same  thing  as  money,  although  technically  the 
coins  alone  are  money.    As  a  matter  of  fact,  we  are  using  gold 
as  money  exactly  as  did  the  ancients  before  the  days  of  coin- 
age, except  that  in  olden  times  delicate  scales  for  the  weighing 
of  gold  dust  was  part  of  every  merchant's  equipment,  while 
improvements  in  the  art  of  coinage  have  substituted  for  the 
scales  the  stamp  of  the  mint.    In  the  United  States,  and  in 
most  other  countries  where  gold  is  freely  coined,  banks  count 
the  gold  bars  in  their  vaults  as  part  of  their  money  reserve. 
In  a  country  where  the  free  coinage  of  silver  prevails,  silver 
bullion  is  in  the  same  way  prized  as  money. 

119.  The  value   of   gold  (or  any  commodity  freely  used  as 
money)  is  the  product  of  a  double  demand,  —  the  demand  for  it 
for  use  as  money,  and  the  demand  for  it  for  use  in  the  arts. 
Gold  possesses  two  separate  utilities,  that  is  to  say,  it  is  wanted 
for  two  separate  and  distinct  purposes.    Its  value  is  the  result 
of  this  double  demand.    A  certain  portion  of  the  world's  gold 

the  said  bullion  shall  have  been  coined,  the  person  or  persons  by  whom  the 
same  shall  have  been  delivered,  shall  upon  demand  receive  in  lieu  thereof  coins 
of  the  same  species  of  bullion  which  shall  have  been  so  delivered,  weight  for 
weight,  of  the  pure  gold  or  pure  silver  therein  contained."  In  1873  tne  ^ree 
coinage  of  silver  was  suspended. 


COMMODITY  OR  METAL   MONEY 


181 


supply  is  appropriated  for  use  as  money,  and  a  certain  portion 
for  use  in  the  arts,  and  its  value  must  tend  to  rise  whenever 
the  demand  from  either  source  is  increased. 

The  value  of  money  in  the  United  States,  for  example,  is 
determined  by  two  sets  of  demand  and  supply  conditions  : 
(i)  directly,  by  demand  for  and  supply  of  gold  coins  in  the 
United  States ;  and  (2)  indirectly,  by  the  demand  for  and  supply 
of  gold  throughout  the  world.  The  reader  will  observe  that  no 
exception  to  the  law  governing  the  value  of  money  is  here 
involved.  Automatically,  through  the  operation  of  self-interest 
among  men,  the  supply  of  gold  coins  is  so  regulated  that  their 
value  coincides  in  the  long  run  with  the  value  of  the  gold  bullion 
of  which  they  are  made.  The  following  diagram  illustrates  the 


WORLD  DEMAND  FOR  USE 
IN  ARTS  AND  AS  MONEY 


DEMAND  FOR  MONEY  IN 
UNITED   STATES 


GOLD  BULLION 

358  GRAINS 


WORLD'S  SUPPLY  OF  GOLD 


SUPPLY  OF  MONEY  IN 
UNITED  STATES 


DIAGRAM  V 


relation  between  gold  as  bullion  and  gold  as  money.  Here  we 
have  two  hundred  and  fifty-eight  grains  of  standard  gold  both 
in  the  form  of  bullion  and  in  the  form  of  a  ten-dollar  gold  piece. 
The  value  of  the  bullion  depends  upon  world  conditions  of 
demand  and  supply ;  that  of  the  coin  depends  on  the  money 
demand  and  supply  in  the  United  States.  Although  entirely 


182  MONEY  AND   CURRENCY 

different  conditions  govern  the  values  of  these  two  things, 
the  value  of  the  one  must  always  nearly  equal  that  of  the 
other,  for  the  one  can  be  converted  into  the  other  without 
cost  to  the  person  making  the  conversion.  When  the  conditions 
governing  the  value  of  money  in  the  United  States  lift  its  value 
above  that  of  the  bullion,  more  bullion  is  coined  and  the  value 
of  money  is  lowered  by  the  increase  in  its  supply.  The  supply 
of  available  bullion  is  at  the  same  time  reduced  and  its  value 
correspondingly  raised.  On  the  other  hand,  if  the  demand  for 
gold  as  bullion  lifts  its  value  above  that  of  the  coin,  an  equi- 
librium is  effected  by  means  of  the  melting  pot.1  The  coin  and 
bullion,  it  should  be  noticed,  do  not  always  possess  exactly  the 
same  value ;  if  they  did,  no  bullion  would  ever  be  coined,  and 
no  coins  would  ever  be  melted  down. 

1 20.  It  is  frequently  said  that  the  value  of  our  money 
depends  on  the  value  of  gold.  It  should  be  noticed  that  this 
statement  is  only  a  half  truth,  for  it  is  equally  true  that  the 
value  of  gold  depends  upon  the  value  of  money.  Gold,  as  we 
have  said,  gets  its  value  from  a  double  demand,  and  its  value 
will  tend  to  increase  whenever  there  is  an  increase  in  either 
demand.  Some  writers  talk  about  what  they  call  the  commer- 
cial value  of  gold,  or  the  value  of  gold  in  the  markets  of  the 
world,  as  if  that  were  something  quite  independent  of  its  mone- 
tary value,  and  as  if  this  commercial  value  fixed  the  values 
of  gold  coins.  The  so-called  "  commercial  value  "  of  gold  and 
silver  is  in  reality  the  product  of  the  demand  for  those  metals 
for  use  not  only  in  the  arts  but  also  as  money.  Any  increase 
in  the  demand  for  money  in  Europe  or  in  the  United  States 
will  tend  to  raise  the  commercial  value  of  gold  ;  and  any  increase 
in  the  demand  for  money  in  China  will  tend  to  raise  the  com- 
mercial value  of  silver.  The  value  of  money  is  not  in  any  sense 
derivative  from  that  of  gold  ;  yet  under  a  system  of  free  coinage 

1  The  "  melting  pot  "  in  this  section  serves  to  include  all  methods  of  withdraw- 
ing gold  from  use  as  money  when  its  value  as  bullion  exceeds  its  value  as  coin. 
It  includes,  therefore,  the  exportation  of  gold,  which,  as  shown  in  Chapter  V,  is 
always  evidence  that  it  is  worth  more  as  bullion  abroad  than  as  money  at  home. 
When  gold  coins  are  packed  in  bags  for  export,  they  are  essentially  reduced  to 
bullion  as  much  as  if  they  had  been  melted. 


COMMODITY   OR   METAL   MONEY 

any  increase  in  the  supply  of  gold  will  cause  an  increase  in  the 
supply  of  money,  so  that  the  values  of  gold  bullion  and  money 
will  fall  together ;  and,  conversely,  if  an  increasing  demand  for 
money  raises  its  value,  the  value  of  gold  will  be  lifted  at  the 
same  time. 

Practically  all  the  gold  mined  in  the  United  States  (some 
$80,000,000  in  1904)  is  turned  over  to  the  government  mints, 
the  owners  receiving  immediate  payment  in  gold  coin  or  in 
checks  convertible  into  cash.  It  does  not  follow,  however,  that 
all  the  new  gold  is  absorbed  by  the  demand  for  money.  Gov- 
ernment officials  have  learned  by  experience  that  the  coinage 
of  all  the  gold  received  involves  needless  expense,  for  a  cer- 
tain portion  of  it  is  always  wanted  in  the  shape  of  bullion  bars. 
Therefore  the  government  converts  some  of  the  country's 
new  gold  into  coin,  some  into  exporters'  bars,  and  some  into 
so-called  jewelers'  bars.  It  is  estimated  that  the  industrial  or 
manufacturing  demand  for  jewelers'  bars  absorbs  about  20 
per  cent  of  the  annual  output  in  this  country ;  all  the  rest 
becomes  money,  for  exporters'  bars  are  counted  as  money  both 
in  the  vaults  of  the  national  Treasury  and  in  the  reserves  of 
banks.  If  the  demand  for  gold  in  the  arts  increases,  its  value 
tends  to  rise,  and  the  proportion  of  the  whole  supply  coined 
into  money  is  diminished,  an  upward  tendency  at  the  same  time 
being  given  to  the  value  of  gold  coins  or  money. 

121.  The  truth  as  to  the  relation  between  the  value  of  gold 
as  money  and  gold  as  bullion  is  not  easily  seen  for  the  reason 
that  since  gold  has  no  price  variations  in  its  value  cannot  be 
measured  in  the  ordinary  way.  Its  so-called  "price"  is  always 
$20.67  Per  fine  ounce,  or  $18.60  per  standard  ounce,  and  that 
price  is  the  same  whether  for  bullion  or  for  coins.  How, 
then,  can  there  be  any  difference  between  the  values  of  the 
two  ?  The  reader  can  easily  answer  this  question  unaided  if  he 
will  bear  in  mind  the  obvious  fact  that  the  "  mint  price"  of 
gold  furnishes  no  indication  whatever  as  to  the  value  of  gold. 
Gold  is  no  exception  among  commodities.  Wool,  for  example, 
may  be  said  to  be  subject  to  a  threefold  demand,  being  wanted 
by  the  manufacturers  of  knitting  yarns,  of  clothing,  and  of 


1 84  MONEY  AND   CURRENCY 

blankets.  Its  value  is  derived  from  those  articles,  and  will 
vary  as  the  demand  for  them  varies.  The  quantity  of  wool 
that  is  converted  into  each  of  these  commodities  is  determined 
by  the  demand  for  and  value  of  each.  If  war  increases  the 
value  of  blankets,  then  blanket  manufacturers  will  outbid  the 
others  and  obtain  a  larger  share  of  the  world's  stock  of  wool 
than  usual ;  on  the  other  hand,  if  fashion  dictates  a  larger  use 
of  woolen  clothing,  then  the  bidding  from  manufacturers  of 
cloth  will  raise  the  price  of  wool  and  a  larger  share  of  the  stock 
will  go  to  them.  There  is  no  such  bidding  for  gold  in  the  mar- 
kets of  a  gold-standard  country,  but  exactly  the  same  competi- 
tion for  the  stock  of  gold  is  carried  on  between  the  arts  demand 
and  the  money  demand.  On  the  one  side  are  the  manufacturers 
of  jewelry,  gold  plate,  etc.,  and  the  strength  of  their  demand 
depends  on  the  popular  demand  for  articles  made  of  gold,  their 
profits  tending  to  increase  as  that  demand  increases.  On  the 
other  side  are  the  whole  people  bidding  for  gold  by  their  offers 
of  goods  for  money,  their  bids  rising  in  proportion  as  they  lower 
the  prices  of  their  goods,  and  falling  as  they  raise  the  prices 
of  their  goods. 

VALUE  OF  THE  METAL  INCREASED 

122.  Free  coinage  gives  to  a  metal  practically  all  the  utilities 
of  money.  We  have  seen  that  in  the  U.nited  States,  on  account 
of  a  law  which  permits  the  free  coinage  of  gold,  the  value  of  an 
ounce  of  gold  when  uncoined  is  practically  the  same  as  its  value 
when  coined  ;  and  that  on  this  account  people  naturally  look 
upon  gold  itself  as  money.  To  the  average  man  gold  is  the  one 
thing  which  never  changes  in  price  ;  he  thinks  of  an  ounce 
of  pure  gold  as  at  all  times  worth  $20.67,  for  that  is  the  sum  of 
money  into  which  he  can  have  it  coined  at  the  mint.  So  he 
prizes  an  ounce  of  gold  just  as  he  would  prize  $20.67.  He  is 
right  in  his  thought  that  the  two  things  are  practically  the 
same,  but  he  is  wrong  in  supposing  that  $20.67  *s  tne  price  of 
gold;  an  ounce  of  pure  gold  when  coined  is  $20.67;  that  ($20.67) 
is  simply  its  money  name,  just  as  "ounce"  is  the  Troy  weight 
name.  Because  gold  may  at  all  times  be  converted  into  a  definite 


COMMODITY   OR   METAL   MONEY  185 

sum  of  coined  money,  its  value  being  practically  the  same 
when  coined  as  when  uncoined,  the  metal  possesses  for  most 
people  a  peculiar  fascination,  and  is  regarded  as  something 
totally  unlike  all  other  metals.  A  man  with  uncoined  gold  in 
his  possession  feels  that  he  has  something  as  good  as  money 
itself  ;  it  does  not  possess  the  same  ready  exchangeability,  for 
scales  and  tests  are  needed,  but  it  possesses  the  same  value 
or  purchasing  power  and  can  with  little  trouble  be  converted 
into  coin. 

123.  The  free  coinage  of  a  metal  into  money  increases  the 
demand  for  it.    This  proposition  follows  logically  from  the  pre- 
ceding one.     Since  the  free  coinage   of  gold   gives  to  it  the 
.utilities  of  money,  it  is  now  wanted  on  account  of  these  utilities 
as  well  as  on  account  of  what  may  be  called  its  art  utilities.    If 
the  world  were  not  using  gold  as  money,  the  demand  for  it 
would  come  entirely  from  the  arts  ;  this  demand,  due  to  the 
beauty  of  gold  and  to  its  use  by  dentists  and  in  certain  trades, 
would  be  the  only  demand  it  would  fill.    Its  value  would  be 
fixed  solely  by  its  art  utilities.    But  free  coinage  gives  it  a  new 
utility,  the  money  utility,  and  the  demand  for  it  is  thereby 
increased.    The  value  of  gold  at  the  present  time,  therefore,  is 
greater  than  it  would  be  if  it  were  not  freely  coined  into  money. 

124.  It  is  impossible  to  determine  what  proportion   of  its 
value  gold  derives  from  its  use  as  money,  for  we  cannot  make 
accurate  comparison  of  the  monetary  and  nonmonetary  demands. 
Since  only  about  one  fifth  of  the  new  gold  mined  each  year  is 
now  absorbed  by  the  arts,  we  may  justly  infer  that  the  monetary 
demand  is  at  least  four  times  greater  than  the  nonmonetary. 
This  method  of  comparison,  while  it  is  the  only  one  possible, 
does  not  allow  the  proper  weight  to  the  monetary  demand,  for 
that  does  not  find  full  expression  in  the  statistics  of  coinage. 
In  1902,  for  instance,  the  world's  coinage  of  gold  amounted  to 
about  $220,000,000,  or  nearly  11,000,000  ounces.1    These  fig- 
ures by  no  means  measure  the  money  demand  for  gold  born  of 
the  prerogative  of  free  coinage.    The  large  use  of  gold  bullion 

1  Of  this  amount  $39,000,000  was  recoinage.    See  Report  of  Director  of  the 
Mint  for  rgoj,  pp.  49  and  142. 


186  MONEY  AND   CURRENCY 

as  money  must  also  be  taken  into  account.  In  all  civilized 
countries,  on  account  of  the  right  of  free  coinage,  uncoined 
gold  is  specially  prized  as  being  equivalent  to  money  itself,  and 
by  banks  is  preferred  to  coin  in  the  settlement  of  international 
obligations.  From  the  mere  statistics  of  coinage,  therefore,  we 
get  no  idea  of  the  effect  which  the  money  demand  has  upon  the 
value  of  gold.  When  a  metal  is  coined  into  credit  money,  as  is 
silver  in  the  United  States,  the  case  is  entirely  different,  for  then 
the  metal  itself  acquires  no  utility  as  money,  and  the  effect  upon 
the  value  of  the  metal  is  proportionate  to  the  quantity  coined. 

There  is  still  another  reason  why  we  cannot  safely  assume 
to  measure  the  money  demand  for  gold  by  the  quantity  of  it 
that  is  coined.  Even  though  only  coined  gold  were  used  as 
money,  yet  the  intensity  of  the  demand  for  money  would  not 
be  revealed  by  coinage  statistics.  The  quantity  of  gold  needed 
as  money  declines  in  proportion  as  its  value  rises.  If  the  value 
of  gold  rises  100  per  cent,  only  half  as  much  gold  is  needed  to 
consummate  a  given  volume  of  exchanges.1  It  is  evidently 
absurd,  therefore,  to  hold,  as  do  some  writers,  that  the  money 
demand  for  gold  was  not  increasing  after  1873  merely  because 
the  world's  coinage  at  that  time  was  declining.  In  1873  the 
mints  of  the  world,  it  is  estimated,  coined  12,000,000  ounces  of 
gold,  whereas  in  1883  they  coined  only  5,000,000  ounces,  and 
in  1891  only  5, 700,000  ounces.  We  cannot  conclude  from  these 
figures  that  the  money  demand  for  gold  declined  after  1873,  for 
after  that  year  the  value  of  gold  increased,  so  that  an  ounce  of 
it  in  1883  and  1891  satisfied  a  larger  demand  for  money  than 
in  1873. 

It  should  be  noted  that  the  quantity  of  gold  consumed  in  the 
arts  does  not  decline  in  proportion  as  the  value  of  gold  rises. 
A  rise  in  the  value  of  gold  is  never  accompanied  by  a  corre- 
sponding decline  in  the  demand  for  gold  bijoutry,  nor  is  a  fall 

1  In  the  language  of  the  economists,  the  "  demand  curve  "  for  gold  to  serve  as 
money  varies  with  absolute  uniformity  as  its  value  varies.  That  can  be  said  of  no 
commodity  except  when  it  is  freely  coined  into  money.  If  the  value  of  salt,  for 
instance,  were  doubled,  there  would  be  no  reason  to  expect  that  the  consumption 
of  salt  would  be  reduced  one  half.  The  "  demand  curves  "  of  most  commodities 
are  irregular  in  their  variations,  but  that  of  money  is  uniform. 


COMMODITY   OR   METAL   MONEY  187 

in  its  value  attended  by  any  notable  increase  in  that  demand. 
Indeed,  the  attention  of  people  is  not  generally  drawn  to  the 
fact  that  gold  has  changed  in  value,  for  there  is  little  change 
in  the  prices  of  articles  made  of  gold.  As  gold  rises  in  value, 
therefore,  since  a  given  quantity  satisfies  a  larger  monetary 
demand,  the  arts  or  industrial  demand  tends  to  absorb  an 
increasing  proportion  of  the  new  supplies. 

EFFECTS  OF  SEIGNIORAGE 

125.  A  seigniorage  charge,  under  a  system  of  free  coinage, 
raises  the  value  of  the  coin  above  that  of  the  same  weight  of 
uncoined  bullion  by  an  amount  equal  to  the  seigniorage  per- 
centage. There  are  two  ways  in  which  a  government  may  exact 
its  seigniorage.  It  may  coin  only  part  of  the  gold,  retaining  a 
certain  proportion  as  seigniorage  and  not  coining  it,  or  it  may 
coin  all  the  gold  and  retain  part  of  the  coins.  In  either  case, 
unless  people  disapprove  of  the  seigniorage,  the  value  of  the 
coins  will  be  above  that  of  the  uncoined  bullion  by  the  amount 
of  seigniorage.  The  proviso,  "  unless  people  disapprove,"  is 
necessary,  for  if  the  coins  so  issued  are  not  generally  acceptable 
as  money,  the  demand  for  money,  and  hence  its  value,  will  be 
affected.  The  supply  of  money  will  be  no  greater,  whether  the 
seigniorage  is  coined  or  uncoined,  than  it  would  be  if  no  seign- 
iorage were  taken,  so  that  the  value  of  money,  the  demand  for 
it  not  having  been  affected,  will  be  unchanged. 

The  truth  of  these  propositions  may  be  made  clear  by  illus- 
tration. Let  us  suppose  that  Congress  provides  for  a  seigniorage 
of  10  per  cent  on  gold  coins.  This  could  be  done  in  four  ways: 
(i)  the  government  could  mint  coins  of  the  present  weight,  but 
coin  only  90  per  cent  of  the  bullion  offered,  retaining  its  10  per 
cent  seigniorage  in  bullion;  (2)  it  might  mint  into  coins  of  the 
present  weight  all  the  bullion  offered  and  keep  10  per  cent 
of  the  coins,  treating  them  like  other  money  in  its  possession; 
(3)  it  might  debase  the  coins  10  per  cent  (i.e.  make  them  con- 
tain 10  per  cent  less  gold)  and  coin  only  90  per  cent  of  the  bul- 
lion offered,  retaining  the  rest  as  seigniorage;  (4)  it  might  debase 


1 88  MONEY  AND    CURRENCY 

the  coins  10  per  cent,  coin  all  the  bullion  offered,  and  retain 
10  per  cent  of  the  coins.  Let  us  see  what  effect  each  of  these 
methods  would  tend  to  have  on  prices  and  upon  the  value- 
relation  between  gold  bullion  and  gold  coins. 

The  first  plan  would  cause  no  change  in  the  supply  of  money 
and  so  would  have  no  immediate  effect  upon  prices,  but  men 
would  cease  for  a  time  to  take  gold  to  the  mint,  for  in  exchange 
for  an  ounce  of  pure  gold  they  would  receive  only  $18.60  instead 
of  $20.67,  the  amount  now  given.  The  supply  of  money  not 
increasing,  its  value  would  gradually  rise  as  the  demand  for 
money  increased  with  the  growth  of  the  country.  Sooner  or 
later  gold  coins  would  be  worth  10  per  cent  more  than  the 
same  amount  of  uncoined  bullion,  and  then  men  would  be 
under  the  same  inducement  as  now  to  have  their  bullion  con- 
verted into  coin. 

Results  under  the  second  plan  would  be  almost  the  same  as 
under  the  first.  As  the  government,  however,  would  coin  all 
bullion  presented,  a  given  amount  of  bullion  taken  to  the  mint 
would  have  a  greater  effect  upon  the  value  of  money  than  under 
the  first  method.  Less  bullion,  therefore,  would  be  delivered 
to  the  mint,  and  no  bullion  at  all  would  be  taken  there  until 
gold  coined  was  worth  10  per  cent  more  than  gold  uncoined. 
The  permanent  price  level  under  this  and  the  first  plan  would 
be  some  10  per  cent  lower  than  it  would  have  been  had  no 
seigniorage  been  exacted ;  for  prices,  instead  of  reflecting  the 
value  of  gold,  would  reflect  the  value  of  coins  worth  10  per  cent 
more  than  the  gold  they  contained.  The  so-called  "  mint  price  " 
of  gold  under  the  first  and  second  methods  would  be  $18.60 
per  ounce  fine. 

The  third  method  involves  a  debasement  of  the  coinage  and 
it  would  seem  that  the  value  of  money  should  fall  as  a  result, 
but  this  would  not  happen  so  long  as  people  were  willing  to  use 
the  light-weight  coins  as  money.  Under  this  plan  a  man  taking 
100  ounces  of  gold  to  the  mint  would  receive  $2067,  the  same 
amount  now  given,  but  the  coins  would  be  10  per  cent  lighter 
than  those  now  in  use;  a  gold  eagle,  now  containing  258  grains 
standard  gold,  would  then  contain  only  232.2  grains.  Men  would 


COMMODITY  OR   METAL   MONEY  189 

surely  not  be  more  eager  to  get  these  light-weight  coins  in  ex- 
change for  their  gold  than  they  are  to  get  coins  of  the  present 
weight ;  prices,  therefore,  could  not  rise  on  account  of  an  increas- 
ing supply  of  money.  Nor  would  prices  fall  on  account  of  a 
diminution  of  the  money  supply.  A  fall  of  prices  would  seem 
paradoxical,  for  it  would  mean  that  the  light-weight  coins  had 
greater  purchasing  power  than  full-weight  coins.  Since  these 
new  coins  would  be  worth  as  much  as  the  coins  now  in  use  (for 
we  have  seen  that  prices  could  not  rise),  the  owners  of  bullion 
would  be  under  the  same  inducement  as  now  to  have  it  coined. 
If  they  hesitated  for  any  length  of  time  about  exchanging  their 
bullion  for  light-weight  coins,  the  increasing  demand  for  money 
would  lift  the  value  of  these  coins  above  their  present  level  and 
prices  would  fall.  It  would  not  take  bullion  dealers  long  to 
discover  that  the  United  States  Mint  was  their  best  market 
place.  Thus  a  seigniorage  under  the  third  method,  if  the  new 
money  were  acceptable  to  the  people,  would  have  no  effect  what- 
ever upon  the  prices  of  goods  or  upon  the  value  of  gold. 

The  fourth  plan  involves  a  like  debasement  of  the  coinage, 
with  the  difference  that  all  the  bullion  presented  to  the  mint  is 
coined  into  money.  Would  not  this  cause  a  10  per  cent  increase 
of  the  supply  and  hence  a  rise  of  prices  ?  It  would  not.  The 
mint  price  of  gold  would  be  the  same  as  now,  namely  $20.67,  and 
men  would  get  the  same  profit  from  having  gold  coined  that 
they  get  now.  A  given  amount  of  bullion  would  be  coined  into 
more  money  than  at  present,  but  no  increase  in  the  money 
supply  would  result,  for  any  tendency  on  the  part  of  money  to 
fall  in  value  would  be  instantly  checked  by  the  cessation  of 
coinage,  since  men  would  not  take  bullion  to  the  mint  unless  it 
were  worth  10  per  cent  more  when  coined  than  when  uncoined. 

These  conclusions  with  regard  to  the  effects  of  seigniorage, 
especially  when  a  debasement  of  the  coinage  is  involved,  may 
seem  to  run  counter  to  the  generally  accepted  statement  that  a 
seigniorage,  if  it  is  coined,  will  cause  prices  to  rise.1  That  state- 
ment is  true  only  when  the  coinage  is  restricted,  being  under 

1  See  Walker's  Political  Economy  (advanced  course),  p.  147 


190  MONEY  AND   CURRENCY 

control  of  the  government.  If,  for  example,  the  free  coinage  of 
gold  in  this  country  were  stopped  and  the  government  should 
recoin  all  our  gold  money,  making  the  coins  10  per  cent  lighter 
than  the  present,  the  money  supply  would  be  increased  10  per 
cent  and  the  value  of  money  would  correspondingly  fall.  If,  how- 
ever, the  government  recoined  only  90  per  cent  of  the  existing 
stock  of  gold  money,  holding  the  rest  in  the  Treasury,  the 
money  supply  would  not  be  increased  and  prices  would  not  be 
affected.  Under  a  system  of  restricted  coinage,  therefore,  it 
is  perfectly  true  to  say  that  the  coinage  of  a  seigniorage  tends 
to  raise  prices  ;  but  under  a  system  of  free  coinage  it  can  have 
such  effect  only  in  so  far  as  it  lessens  the  demand  for  gold  bul- 
lion and  so  lowers  the  value  of  gold. 


SEIGNIORAGE  OF   100  PER  CENT 

126.  If  the  gold  coins  of  the  United  States  could  lose  10  per 
cent  of  their  gold  without  losing  any  of  their  value,  why  not 
50  per  cent,  or  even  100  per  cent  ?  Why  should  not  the  gov- 
ernment keep  all  the  gold  and  issue  paper  dollars  in  exchange 
for  gold  brought  to  the  mint  ?  Theoretically  there  is  no  reason 
why  a  seigniorage  of  50  or  100  per  cent  should  not  be  exacted. 
Ricardo  stated  the  truth  upon  this  subject  as  follows: 

The  whole  charge  for  paper  money  may  be  considered  as  seigniorage. 
Though  it  has  no  intrinsic  value,  yet,  by  limiting  its  quantity,  its  value  in 
exchange  is  as  great  as  an  equal  denomination  of  coin,  or  of  bullion  in  that 
coin.  On  the  same  principle,  too,  namely  by  a  limitation  of  its  quantity,  a 
debased  coin  would  circulate  at  the  value  it  should  bear,  if  it  were  of  the 
legal  weight  and  fineness,  and  not  at  the  value  of  the  quantity  of  metal 
which  it  actually  contained. — Political  Economy  (Bohn's  edition),  p.  341. 

If  the  people  of  the  United  States  had  no  desire  to  see  or 
use  any  gold  coins,  and  had  implicit  confidence  in  their  govern- 
ment, legislative  and  executive,  a  law  providing  that  men  who 
take  gold  to  the  mint  shall  receive  in  new  paper  money  $20.67 
per  fine  ounce  would  have  no  effect  upon  the  value  of  money 
or  upon  prices  in  this  country.  The  new  paper  money  need 


COMMODITY   OR   METAL   MONEY 


191 


not  even  be  a  promise  to  pay  gold  ;  it  might  merely  be  in- 
scribed "one  dollar,"  "five  dollars,"  etc.,  and  yet  the  value  of 
money  would  not  be  affected,  for  the  amount  of  paper  money 
issued  would  not  exceed  the  amount  of  gold  coins  that  would 
have  been  minted  had  the  law  not  been  changed.  The  country 
would  be  on  the  gold  standard  practically  as  it  is  now,  the  value 
of  money  corresponding  with  the  value  of  gold  bullion.1 

The  result  would  be  the  same  even  if  the  law  provided  that 
the  government  might  sell  or  otherwise  dispose  of  the  gold 
bullion  that  it  received ;  except  that  in  this  case,  the  govern- 
ment not  keeping  a  hoard  of  gold  and  none  being  used  by  the 
people  as  money,  a  large  quantity  (about  $1,250,000,000  in 
-1905)  would  be  thrown  upon  the  world's  markets,  its  value 
would  fall,  and  prices  in  all  gold-standard  countries,  including 
the  United  States,  would  rise.2 

127.  In  France  we  may  see  the  effects  of  seigniorage  in 
operation.  According  to  the  French  law  one  kilogram  of  gold 
is  coined  into  3100  francs,  of  which  the  government  retains 
seven  as  seigniorage.  On  account  of  this  seigniorage  charge  the 
so-called  "mint  price  "  of  gold  in  France  is  not  3100  francs  per 
kilogram,  but  3093  francs,  for  that  sum  of  money  is  all  that 
a  man  can  get  from  the  government  for  a  kilogram  of  gold. 
Gold  coins  amounting  to  3100  francs  weigh  only  one  kilogram, 
but  no  man  would  give  them  in  exchange  for  their  weight  in 
gold.  On  account  of  this  difference  between  the  value  of  coined 
and  uncoined  gold,  the  gold  coins  of  France  are  seldom  melted 
down  or  exported.  The  Bank  of  France,  when  it  has  occasion 
to  export  gold,  ships  bars  of  bullion  or  the  coins  of  some 

1  Correspondence  in  value  between  the  paper  money  and  gold  bullion  would  be 
lacking  whenever  the  latter  was  rising  in  value  more  rapidly  than  money,  for  the 
supply  of  money  could  not  then  be  reduced  as  now  by  the  melting  pot. 

2  Ricardo  in  his  Proposals  for  an  Economical  and  Secure  Currency  suggested  a 
plan  resembling  that  above  outlined,  but  not  so  radical.     He  suggested  that  the 
Bank  of  England  be  permitted  to  issue  its  notes  for  uncoined  bullion,  showing 
that  this  plan  would  give  England  a  paper  currency  regulated  by  the  value  of 
gold.    See  Political  Economy r,  chap,  xxvii.    "Currency  is  in  its  most  perfect  state," 
said  Ricardo,  "  when  it  consists  wholly  of   paper  money,  but  of   paper  money 
of  an  equal  value  with   the  gold  which  it  professes  to  represent."  —  Political 
Economy,  p.  339. 


192  MONEY  AND   CURRENCY 

country,  like  the  United  States  or  England,  in  which  gold  is 
minted  without  seigniorage.  If  it  should  ship  French  coins 
abroad,  it  would  send  out  something  worth  in  France  (but  not 
in  other  countries)  about  one  fifth  of  i  per  cent  more  than  the 
same  amount  of  gold  uncoined. 

The  French  government  coins  all  the  metal  which  it  receives, 
and  all  these  coins  finally  get  into  circulation,  for  the  govern- 
ment uses  the  seigniorage  tax  for  the  payment  of  expenses 
just  as  it  does  receipts  from  any  other  tax.  Consequently  a 
given  amount  of  gold  in  France  makes  for  the  country  one  fifth 
of  i  per  cent  more  money  than  it  would  make  if  no  seignior- 
age were  exacted.  So  if  the  United  States  government  should 
levy  a  seigniorage  of  10  per  cent  on  gold  coinage,  the  existing 
supply  of  money  (and  the  present  level  of  prices)  would  be 
maintained  with  10  per  cent  less  gold  than  is  now  necessary. 

ADVANTAGES  OF  SEIGNIORAGE 

128.  Difference  of  opinion  exists  as  to  the  practical  ad- 
vantage of  a  seigniorage  charge.  Among  English  writers  the 
weight  of  authority  opposes  any  charge  for  coinage  in  excess 
of  the  actual  expense,  it  being  held  that  thus  perfect  inter- 
changeability  between  coin  and  bullion  is  secured,  so  that  the 
supply  of  money  is  automatically  regulated.  This  argument  is 
not  valid,  however,  for  a  seigniorage  tax,  although  it  separates 
the  values  of  coin  and  bullion,  does  not  destroy  their  inter- 
changeability  ;  it  merely  changes  the  ratios  of  exchange. 

Another  objection  to  seigniorage  is  the  profit  it  offers  to 
counterfeiters,  but  this  objection  holds  only  against  an  exces- 
sive seigniorage,  say  10  per  cent  or  more.  An  illustration  is 
furnished  by  the  silver  dollar  at  the  present  time.  Although 
worth  a  dollar  in  gold,  its  constituent  bullion  is  worth  less 
than  fifty  cents.  The  profit  derived  from  making  counterfeit 
silver  dollars  out  of  standard  silver  necessitates  constant 
watchfulness  on  the  part  of  the  government. 

The  advantages  of  seigniorage  are  :  (i)  it  is  economical,  for 
a  given  quantity  of  metal  makes  a  larger  amount  of  money; 


COMMODITY   OR   METAL   MONEY  193 

(2)  it  prevents  the  exportation  or  melting  of  coins.  Inter- 
national payments  are  made  in  bullion  valued  by  its  weight 
in  accordance  with  its  mint  price  in  the  country  receiving  it ; 
if  seigniorage  has  been  exacted,  the  coins  of  a  country  will 
remain  at  home,  for  a  shipment  of  coins  to  a  foreign  country, 
where  they  would  be  valued  by  weight  as  if  they  were  bullion, 
would  involve  a  loss  of  value  equal  to  the  seigniorage.  It  may 
be  objected  that  the  free  movement  of  coins  into  and  out  of  a 
country  is  desirable  in  order  that  a  redundancy  or  scarcity  of 
money  may  be  automatically  corrected,  but  this  objection  has 
little  force,  for  shipments  of  bullion  would  serve  the  same  pur- 
pose. The  banks  exporting  bullion  would  be  compelled  either 
to  replace  it  in  their  vaults  or  to  contract  their  credit ;  and  in 
either  case  the  effect  upon  the  price  level  would  be  the  same 
as  that  produced  by  an  exportation  of  gold  coins  from  a  coun- 
try in  which  coinage  is  gratuitous. 

The  advantages  of  a  seigniorage  tax  may  be  summed  up  in  one 
word,  —  economy,  —  and  it  is  doubtful  if  they  are  great  enough 
ever  to  give  the  subject  practical  importance.  Between  1792 
and  1901  the  United  States  mints  coined  gold  pieces  amounting 
to  $2,305,000,000,  and  of  this  sum  over  $1,600,000,000  was 
coined  after  1870,  yet  it  is  doubtful  if  over  $700,000,000  in 
gold  coin  has  remained  in  the  country.  Much  has  been  melted 
for  use  in  the  arts,  some  has  been  lost,  and  many  millions 
of  American  eagles  and  double  eagles  now  lie  in  the  vaults  of 
European  banks,  where  they  figure  as  bullion.  The  expenses 
of  coinage,  however,  are  not  large  enough  to  make  these  facts 
a  cause  of  much  regret.1 

129.  In  the  foregoing  discussion  more  has  been  said  of  gold 
than  of  silver.  The  reader  must  not  imagine  that  the  prin- 
ciples elucidated  apply  only  in  the  case  of  gold.  They  are 

1  In  the  Report  of  the  Director  of  the  Mint  for  1902  (p.  1 54)  the  earnings 
of  the  mints  and  assay  office  for  1902  are  given  as  $11,371,802,  and  the 
expenditures  $1,650,189.  Among  the  earnings  is  included  the  seigniorage  on 
silver  dollars  and  minor  coins,  which  cannot  be  properly  regarded  as  either 
profit  or  seigniorage,  these  coins  being  credit  money  and  part  of  the  govern- 
ment's debt.  The  net  cost  of  the  mints  and  assay  office  for  that  year  seems 
to  have  been  about  $1,300,000. 


I94  MONEY  AND   CURRENCY 

equally  applicable  to  silver  or  any  other  metal  that  is  freely 
coined  for  use  as  money.  In  Mexico1  prior  to  1905  a  book  on 
money  would  doubtless  have  made  larger  use  of  silver  than  of 
gold  in  its  illustrations,  for  in  Mexico  silver  was  money  exactly 
as  gold  is  money  here,  the  monetary  unit  being  377.139  grains 
of  pure  silver.  There  was  free  coinage  of  silver  and  a  seignior- 
age tax  of  5  per  cent  was  levied,  the  government  coining  the 
seigniorage.  The  people  of  Mexico  thought  of  silver  as  their 
measure  of  value.  To  them  silver  was  money,  and  it  seemed  to 
them  far  more  stable  than  any  other  commodity.  Prices  in 
Mexico  showed  the  value  of  silver,  for  through  the  free  coinage 
of  silver  all  changes  in  the  value  of  silver  bullion  acted  upon 
the  supply  of  Mexican  money.  The  5  per  cent  seigniorage 
charge  in  Mexico  made  the  value  of  coined  silver  5  per  cent 
greater  than  the  same  amount  of  silver  uncoined.  For  export 
purposes,  however,  the  two  were  identical  in  value,  for  the  gov- 
ernment levied  a  tax  of  5  per  cent  on  all  silver  bullion  exported. 

GRESHAM'S  LAW 

130.  Since  the  use  of  coins  is  certain  to  cause  a  loss  of 
metal  by  abrasion,  the  laws  of  most  nations  fix  limits  of  "  toler- 
ance," providing  that  a  coin  shall  be  legal  tender  even  though 
slightly  under  full  weight.  Gold  coins  of  the  United  States, 
for  example,  may  lose  one  half  of  I  per  cent  of  their  weight  in 
twenty  years  from  the  date  of  coinage  (or  a  ratable  proportion 
in  a  shorter  period)  without  losing  their  legal-tender  quality ; 
but  if  they  lose  more  they  cease  to  be  money  and  are  valued 
by  weight  as  bullion. 

When  occasion  arises  for  the  export  of  gold,  exporters  are 
careful  to  pick  full-weight  coins,  for  these  cost  them  no  more 
than  the  worn  coins  in  circulation,  but  are  worth  more  abroad 
on  account  of  the  greater  quantity  of  bullion  they  contain.  The 
principle  here  involved  is  commonly  referred  to  as  Gresham's 
law,  after  Sir  Thomas  Gresham,  an  English  merchant,  banker, 

1  Mexico  suspended  the  free  coinage  of  silver  in  1905,  adopting  the  so-called 
"gold-exchange  standard,"  which  is  described  in  Chapter  XII,  Section  176. 


COMMODITY  OR  METAL   MONEY  195 

and  statesman,  who  is  credited  with  having  impressed  the  truth 
of  this  principle  upon  Queen  Elizabeth  in  1 560,  when  the  cur- 
rency of  England  was  in  a  chaotic  condition.  The  principle, 
however,  had  been  recognized  by  writers  upon  money  long 
before  the  sixteenth  century,  and,  indeed,  is  not  difficult  of 
apprehension,  being  merely  an  application  of  the  broader  law 
that  all  commodities  tend  toward  those  markets  where  their 
values  are  highest. 

The  popular  expression  of  the  law,  "bad  or  cheap  money 
drives  out  good,"  is  not  strictly  true.  In  every  country  light- 
weight and  full-weight  coins  are  constantly  in  concurrent  cir- 
culation, both  having  exactly  the  same  value  as  money,  and  no 
coins  are  exported  from  a  country  until  the  supply  of  both  is 
excessive,  in  which  case  prices  rise,  gold  becomes  more  valu- 
able abroad  than  within  the  country,  and  increased  imports 
create  a  balance  of  indebtedness  requiring  the  export  of  gold. 
Then  it  is  that  the  full-weight  coins  are  culled  from  the  circu- 
lation and  exported  ;  for  these,  although  worth  no  more  at 
home  as  money  than  the  lighter  coins,  are  worth  more  abroad 
as  bullion.  The  essential  principle  of  the  law  may  be  simply 
stated  as  follows  :  Whenever  a  coin  is  worth  more  as  bullion  than 
as  money,  it  will  either  be  melted  for  use  in  the  arts  or  be  exported 
as  bullion  to  a  foreign  cotmtry. 

In  so  far  as  the  industrial  demand  for  a  metal  is  satisfied 
by  the  melting  of  coins,  the  heavy  coins  are  selected  for  the 
purpose.  In  this  country  Gresham's  law  receives  illustration 
whenever  gold  coins  are  exported  to  Europe,  for  exporters  are 
careful  to  send  only  full-weight  eagles  and  double  eagles.  The 
light  coins  in  circulation  do  not  expel  all  those  of  full  weight 
simply  because  before  the  stock  of  heavy  coins  is  exhausted  the 
industrial  and  export  demand  for  bullion  is  satisfied,  and  there- 
after the  full-weight  coins  possess  no  greater  value  as  bullion 
than  as  money. 

Gresham's  law  is  commonly  given  the  widest  possible  appli- 
cation. It  is  used  to  explain  not  only  the  expulsion  of  heavy 
by  light  coins,  but  also  the  expulsion  of  the  underestimated 
metal  in  a  bimetallic  system  and  the  disappearance  of  the 


196  MONEY  AND   CURRENCY 

standard  metal  when  paper  credit  money  is  allowed  to  depre- 
ciate. These  latter  cases  are  not  exactly  parallel  or  analogous 
with  the  first,  and  cannot  be  adequately  explained  by  reference 
to  a  single  principle  or  law.  The  operation  of  bimetallism  and 
of  depreciated  credit  money  involves  other  principles  quite  as 
important  as  Gresham's  law.  Discussion  of  the  law  as  applied 
to  bimetallism  and  credit  money  is  deferred,  therefore,  until 
these  subjects  are  treated  in  detail. 

History  affords  numerous  illustrations  of  Gresham's  law. 
The  phenomenon  which  it  explains  was  familiar  to  the  Greeks, 
as  is  evidenced  by  the  jeer  of  Aristophanes  because  their  "  old 
and  standard"  coins, 

Recognized  in  every  realm  for  trusty  stamp  and  pure  assay, 
Are  rejected  and  abandoned  for  the  trash  of  yesterday. 

A  striking  illustration  of  the  law  is  given  by  Macaulay  in  his 
History  of  England  (chap.  xxi).  William  III  found  England 
full  of  clipped  and  sweated  coins.  A  recoinage  was  ordered, 
but  the  handsome  new  money  vanished.  "  Great  masses  were 
melted  down  ;  great  masses  exported  ;  great  masses  hoarded;  but 
scarcely  one  new  piece  was  to  be  found  in  the  till  of  a  shop,  or 
in  the  leathern  bag  which  the  farmer  carried  home  after  the 
cattle  fair."  The  country  was  abundantly  supplied  with  money 
in  the  shape  of  light  and  mutilated  coins,  which  were  accepted 
at  their  nominal  value  by  the  government.  As  a  result  the  new 
coins  were  not  needed  as  money  and  were  worth  more  as  bul- 
lion. The  light  coins  continued  to  monopolize  the  circulation 
until  the  government,  by  declaring  them  no  longer  legal  tender, 
stripped  them  of  the  money  utility  or  function. 

REGULATION  OF  SUPPLY 

131.  The  supply  of  metal  money  is  regulated  automatically 
through  the  medium  of  price  and  the  rate  of  interest.  Gold, 
like  any  other  commodity,  always  tends  toward  those  markets 
where  its  value  is  greatest.  In  the  case  of  commodities  in  gen- 
eral their  obedience  to  this  law  is  generally  understood,  for  it 


COMMODITY   OR   METAL   MONEY  197 

means  merely  that  they  move  to  the  markets  where  the  highest 
prices  are  offered  for  them.  No  man  ever  goes  to  the  trouble 
of  exporting  wheat  from  Chicago  to  Liverpool  merely  from  a 
desire  to  feed  the  people  of  England,  or  because  he  wishes  to 
reduce  our  national  surplus.  All  shipments  are  made  because 
owners  can  get  higher  prices  in  Liverpool  than  in  Chicago  or 
New  York.  Just  as  wheat,  cotton,  and  other  commodities  go 
to  the  markets  where  their  values  are  highest,  so  does  gold ; 
but  in  its  case  value  does  not  find  expression  in  price.  In  the 
United  States  and  in  Europe  generally,  low  prices  mean  that 
the  value  of  gold  is  high,  and  high  prices  that  the  value  of  gold 
is  low.  In  no  other  way  is  the  value  of  gold  indicated,  for  it  has 
no  price  in  these  countries.  In  China  silver  is  the  standard  of 
prices  and  the  value  of  silver  is  indicated  by  the  prices  of  com- 
modities in  general,  high  prices  meaning  a  low  value  of  silver, 
and  low  prices  a  high  value  of  silver.  Just  as  in  the  United 
States  and  European  countries  gold,  in  seeking  those  places 
where  its  value  is  highest,  must  move  toward  the  places  where 
prices  are  lowest,  so  silver,  in  China  and  other  countries  upon 
a  silver  basis,  tends  to  go  away  from  high  prices  and  toward 
low  prices. 

The  relation  of  the  rate  of  interest  to  the  international  move- 
ment of  the  precious  metals  is  obvious  even  to  men  who  have 
given  little  thought  to  the  subject.  Ordinarily  it  is  said  that  a 
high  rate  of  interest  attracts  capital,  and  that  a  low  rate  repels 
it.  This  form  of  statement,  generally  speaking,  is  true  enough, 
but  without  analysis  it  is  liable  to  create  the  impression  that 
capital  always  comes  to  a  country  in  the  form  of  gold  (or  silver, 
if  silver  is  the  money  of  the  country).  What  happens  is  this  :  If 
the  supply  of  money  in  a  country  is  temporarily  inadequate  to 
maintain  existing  prices,  bankers  find  their  reserves  declining 
and  raise  their  rate  of  discount.  The  higher  rate  of  interest 
has  a  double  effect,  —  (i)  it  weakens  the  prices  of  stocks  and 
speculative  commodities,  and  (2)  it  increases  the  earnings  of 
money  as  a  basis  of  credit,  that  is,  as  a  banking  reserve.  The 
first  effect  naturally  leads  to  increased  exports  and  diminished 
imports  of  goods  and  securities ;  the  second  causes  bankers  to 


198  MONEY  AND   CURRENCY 

seek  to  convert  their  foreign  balances  or  credits  into  money, 
while  foreign  bankers  are  at  the  same  time  prompted  to  increase 
their  balances  in  the  country  where  the  rate  of  interest  is  high. 
The  combined  result  is  a  flow  of  gold  toward  the  country  of 
relatively  low  prices  and  high  discount  rate,  and  the  move- 
ment continues  until  the  country's  need  for  money  is  satisfied ; 
in  other  words,  until  its  price  level  and  its  rate  of  interest 
(differences  due  to  distance,  amount  of  risk,  etc.,  being  left  out 
of  account)  are  the  same  as  those  of  other  countries  having 
the  same  standard. 

The  price  level  in  all  countries  using  the  same  metal  tends 
to  be  uniform.  It  is  impossible  for  prices  in  England  long  to 
maintain  a  level  at  which  an  ounce  of  gold  can  buy  less  in 
England  than  in  France  and  Germany  or  in  the  United  States. 
A  country  in  which  the  price  level  is  above  that  of  other  gold- 
standard  countries  will  sell  less  to  foreigners  than  usually  and 
will  buy  more  until  it  is  obliged  to  export  some  of  its  gold  in 
payment  of  the  balance.  This  exportation  of  gold,  reducing  its 
own  money  supply  and  increasing  that  in  other  countries,  will 
go  on  until  an  equilibrium  is  established  and  the  price  level  in 
all  is  uniform.  Thus,  through  this  automatic  movement  of  gold 
resulting  from  the  fact  that  people  like  to  buy  goods  where 
prices  are  low  and  sell  where  prices  are  high,  and  to  lend  their 
money  at  the  highest  rate  of  interest,  the  world's  stock  of  gold 
is  evenly  distributed  among  the  countries  using  it  as  money, 
each  country  getting  its  share  without  any  conscious  effort  on 
the  part  of  its  government  or  business  interests. 

Here  we  have  one  of  the  advantages  of  metal  money.  There 
need  be  no  concern  about  the  supply ;  that  is  self-regulated 
and  needs  no  attention  from  any  authority.  Indeed,  any  attempt 
to  regulate  it  is  likely  to  work  more  harm  than  good. 

132.  A  silver  price  level  is  unrelated  to  a  gold  price  level. 
A  fall  of  prices  in  China  indicates  a  rise  in  the  value  of  silver, 
but  has  no  significance  with  regard  to  the  value  of  gold.  It 
may  lead  to  an  exportation  of  silver  from  the  United  States  to 
China,  but  can  have  no  more  effect  upon  the  flow  of  gold  from 
this  country  than  a  rise  in  the  Liverpool  price  of  wheat  can 


COMMODITY   OR   METAL   MONEY 


199 


have  on  our  exports  of  cotton.  Changes  of  prices  in  China 
record  changes  in  the  value  of  silver  and  have  no  relation  to 
the  value  of  gold.  When  prices  in  China  decline  silver  is 
growing  more  valuable  in  China,  and  importations  of  silver 
will  follow  unless  at  the  same  time  that  metal  has  been  rising 
in  value  in  other  countries. 

133.  Credit  money  is  often  coined  from  metal,  and  the  reader 
should  be  careful  not  to  confound  it  with  metal  or  commodity 
money.    Credit  money  is  a  promise  to  pay  money  which  is 
universally    acceptable    as    a    medium    of    exchange,    and    the 
promise  may  be  impressed  upon  a  coin  or  upon  a  piece  of  paper. 
Paper  credit  money  is  the  more  economical,   but   in   certain 
denominations  coins  are  preferred.    Thus  in  the  United  States 
the  silver  dollar  is  a  piece  of  credit  money.    The  promise  is 
not  stamped  upon  the  coin   itself,  but  is  written  in  the  law 
which  provides  for  its  issue.    The  silver  half  dollars,  quarters, 
and  dimes  are  also  credit  money ;   so  are  the  "  nickels  "  and 
bronze  one-cent  pieces.    The  fact  that  we  use  silver,  nickel, 
and  bronze  as  material  for  credit  money  does  not  make  those 
metals  money  at  all.    The  free  coinage  of  gold  gives  it  a  new 
utility,  that  of  exchangeability,  and  makes  the  metal  itself  prac- 
tically money ;  but  the  use  of  silver,  nickel,  and  bronze  as  the 
material  out  of  which  credit  money  is  made  gives  these  metals 
no  new  utility  and  does  not  bring  to  bear  upon  them  any  part 
of  the  demand  for  money. 

1 34.  Gold  and  silver  were  first  made  money  by  custom,  but  the 
law  now  forces  their  use  by  making  them  legal  tender  for  the 
payment  of  debt.    As  business  operations  became  more  involved 
and  important  it  was  found  convenient  for  both   debtor  and 
creditor  to  have  the  law  define  exactly  what  was  money  ;  at  the 
present  time  such  a  law  is  found  on  the  statute  books  of  every 
civilized  people.     In   the   United   States   the  law  defines   the 
dollar  for  the  same  reason  that  it  defines  the  yard  and  the 
bushel,  —  in  order  that  when  these  terms  are  used  in  contracts 
there  can  be  no  doubt  as  to  what  they  mean.    The  dictionary 
is  not  the  book  in  which  to  look  for  an  authoritative  definition 
of  the  word  "dollar";  it  is  to  be  found  only  in  the  Acts  of 


200  MONEY  AND  CURRENCY 

Congress.1  The  definition  of  the  pound  sterling  or  of  the  shilling 
is  found  in  the  Acts  of  Parliament.  Custom  and  the  common 
law  made  gold  legal  tender  in  England  even  before  an  act  of 
Parliament  so  declared  it,  but  English  statesmen  found  it  ex- 
pedient to  give  the  words  "pound,"  "shilling,"  and  "pence" 
definite  meanings  ;  so  the  law  makes  them  signify  certain  quan- 
tities of  gold  in  order  that  there  may  be  no  dispute  between 
debtor  and  creditor. 

Some  writers  have  criticised  the  modern  practice  of  naming 
any  definite  thing  as  legal  tender,  or  of  making  anything  money 
by  law.  They  have  urged  that  money,  like  language,  should  be 
left  entirely  to  the  people ;  that  business  men,  if  left  unham- 
pered by  law  or  legal-tender  acts,  would  adopt  the  money  best 
suited  to  their  needs.  This  objection  to  legal-tender  legislation 
does  not  seem  to  be  well  founded.  The  word  "  dollar,"  like 
"bushel,"  or  "acre,"  or  "yard,"  ought  to  have  a  definite  signifi- 
cation, and  it  is  difficult  to  see  any  good  reason  why  Congress 
should  not  be  allowed  to  define  it.  The  opposition  to  legal-tender 
acts  in  this  country  springs  largely  from  the  unwise  use  which 
Congress  made  of  its  privilege  during  the  Civil  War,  when  it 
enacted  that  United  States  notes  (greenbacks)  should  be  "lawful 
money  and  a  legal  tender  in  the  payment  of  all  debts,  public  and 
private."  2  Since  the  greenbacks  were  not  worth  their  face  in 
coin,  injustice  was  done  by  this  act  in  all  cases  of  debt  incurred 
prior  to  its  passage,  when  gold  and  silver  alone  were  lawful 
money.  However,  a  legislative  body  should  not  be  stripped 
of  its  power  to  make  laws  merely  because  it  may  exercise  that 
power  unwisely.  The  Congress  of  the  United  States  can  usu- 
ally be  relied  upon  to  reject  any  measure  that  is  condemned 
by  the  sober  judgment  of  the  people ;  its  mistakes  in  monetary 

1  In  the  Act  of  March  14,  1900,  the  meaning  of  "dollar"  is  fixed  as  follows: 
"  That  the  dollar  consisting  of  twenty-five  and  eight  tenths  grains  of  standard  gold, 
nine  tenths  fine,  as  established  by  section  3511  of  the  Revised  Statutes  of  the 
United  States  (Act  of  February  12,  1873),  shall  be  the  standard  unit  of  value." 
Compare  this  with  the  vague  definition  in  a  standard  dictionary:  "A  silver  coin  of 
the  United  States,  of  the  value  of  100  cents,  or  rather  above  45.  sterling.  .  .  .    The 
value  of  a  dollar,  the  unit  employed  in  reckoning  money  in  the  United  States." 

2  Act  of  February  25,  1862. 


COMMODITY  OR  METAL  MONEY  2OI 

legislation  have  almost  always  had  their  origin  in  ignorance. 
What  is  needed  is  not  a  curtailment  of  its  power  but  a  better 
understanding  of  the  nature  of  money  among  bankers  and 
business  men. 

LITERATURE 

WHITE,  Money  and  Banking,  chaps,  vi-viii  ;  MILL,  Political  Economy, 
Book  III,  chaps,  xix  and  xxi  ;  WALKER,  Money,  Part  I,  chaps,  v-xi ;  The 
Bullion  Report  (London,  1810),  reprinted  by  the  Sound  Currency  Com- 
mittee, of  the  Reform  Club,  New  York  ;  CARLILE,  The  Evolution  of 
Money,  Part  II,  chaps,  iii  and  iv,  and  passim;  LAUGHLIN,  The  Principles 
of  Money,  chap,  ix  ;  J.  F.  JOHNSON,  "A  New  Theory  of  Prices,"  Political 
Science  Quarterly,  September,  1903  (a  review  of  Laughlin)  ;  H.  PARKER 
-WiLLis,  "  The  Controversy  over  Price  Theories,"  Sound  Currency, 
March,  1904. 

The  annual  reports  of  the  United  States  Director  of  the  Mint  contain 
much  information  concerning  the  monetary  systems  of  foreign  countries. 


CHAPTER  X 

PRODUCTION  AND  VALUE  OF  THE  PRECIOUS  METALS 

135.  Metal  money  lacks  stability  of  value.  136.  Importance  of  the  conditions 
governing  the  supplies  of  the  precious  metals.  137.  The  values  of  the  precious 
metals,  like  the  values  of  other  commodities,  conform  in  the  long  run  to  the  cost 
of  production.  138.  The  production  of  gold  will  tend  to  increase  when  its  value 
is  rising  and  to  decrease  when  its  value  is  falling.  139.  The  gold  miner  is  more 
interested  in  prices,  though  not  consciously,  than  any  other  producer.  140.  The 
use  of  metal  money  results  in  cycles  of  rising  and  falling  prices.  141.  The  value 
of  gold  is  not  subject  to  sudden  variations.  142.  The  present  outlook  for  the 
production  of  gold.  143.  Statistics  of  the  production  of  gold  and  silver  since  1492. 
144.  Changes  in  production  have  been  accompanied  by  corresponding  changes  in 
the  price  level. 

135.  Since  the  value  of  metal  money  must  fluctuate  with  the 
value  of  the  metal,  metal  money  cannot  be  ideal  or  perfect. 
In  a  country  which  uses  gold  as  money,  its  free  coinage 
being  permitted,  the  price  of  any  good  will  tend  to  change 
whenever  its  own  value,  or  whenever  the  value  of  gold,  changes. 
In  such  a  country  prices  are  subject  to  variations  from  three 
different  causes:  (i)  because  the  value  of  a  good  changes  on 
account  of  changes  in  the  demand  for  or  supply  of  it ;  (2)  because 
of  a  change  in  the  relation  between  the  demand  for  and  supply 
of  money ;  (3)  because  of  a  change  in  the  relation  between  the 
demand  for  and  supply  of  gold,  bullion  the  world  over,  for  a 
change  in  the  value  of  gold  bullion  immediately  affects  the 
supply  of  money. 

Metal  money,  therefore,  must  always  lack  stability  of  value, 
and  this  lack  is  its  only  important  defect.  Any  great  increase 
in  the  output  of  the  world's  mines  causes  a  fall  in  the  value  of 
the  metal  and  a  rise  in  the  prices  of  goods  ;  on  the  other  hand, 
when  the  output  is  small  the  metal  becomes  more  valuable  and 
the  prices  of  goods  fall. 

Throughout  the  centuries  during  which  gold  and  silver  have 
been  used  as  money,  prices  have  never  been  free  from  the 

202 


VALUE  OF  THE  PRECIOUS  METALS 


203 


powerful  influence  exerted  by  changes  in  the  available  supply 
of  the  precious  metals.  During  the  Middle  Ages  the  mining 
of  gold  and  silver,  an  arduous  and  dangerous  work  which  the 
Romans  had  imposed  upon  slaves,  practically  ceased,  and  the 
stock  of  the  precious  metals  available  for  monetary  use  suffered 
positive  diminution.  In  addition  to  the  losses  from  abrasion  and 
hoarding,  much  was  absorbed  by  the  church  for  decorative  pur- 
poses. The  value  of  gold  and  silver  rose  and  prices  fell,  until  in 
the  tenth  century  pennies  were  prized  almost  as  dollars  are  now. 

136.  Since  the  values  of  the  metals  which  the  civilized  world 
is  using  as  money  depend  very  much  upon  the  supply  of  the 
metals  themselves,  the  conditions  governing  changes  in  their 
supply  are  of  the  utmost  importance.    Gold  is  now  the  money 
of  Europe  and  the  United  States,  of  Japan,  of  Peru,  of  Mexico, 
and  of  most  of  the  European  colonies.    If  the  value  of  gold 
should  decline  50  per  cent,  prices  in  all  these  countries  would 
be  doubled.   Have  we  any  assurance  that  something  of  the  sort 
will  not  happen?    Do  changes  in  the  value  of  gold  follow  any 
law,  so  that  we  may  look  into  the  future  without  fear  that  our 
wealth  in  bonds  and  mortgages  will  dwindle  and  melt  away 
because  of  rising  prices  ?    Or  are  changes  in  the  value  of  gold 
independent  of  law  and  so  capricious  and  arbitrary  that  we  can 
have  no  definite  knowledge  with  regard  to  the  future  purchasing 
power  of  our  dollar  ?    The  world's  supply  of  gold  is  increasing 
at  an  unprecedented  rate,  yet  the  mines  of  British  Columbia, 
Alaska,  and  South  Africa  seem  only  just  touched.    Is  the  out- 
put   of  these    mines   to   increase  year    after  year    until    gold 
becomes  as  plentiful  as  silver?    If  so,  then  prices  in  gold-using 
countries  are  destined  to  rise  many  hundredfold,  and  an  era  of 
the  wildest  speculation  and  panic  awaits  us. 

COST  OF  PRODUCTION 

137.  The  values  of  the  precious  metals,  like  the  values  of 
other  commodities,  conform  in  the  long  run  to  the  cost  of  pro- 
duction.   This  law  of  value  may  strike  the  reader  as  in  conflict 
with  the  law  of  demand  and  supply,  but  if  he  will  consider  how 


204  MONEY  AND   CURRENCY 

cost  of  production  regulates  the  value  of  a  commodity,  he  will 
see  that  the  two  laws  are  in  perfect  harmony.  If  the  value  of 
an  article  is  such  that  its  price  is  60  cents,  its  supply  will  depend 
upon  the  cost  of  producing  it.  If  the  cost  is  such  that  only  a 
fair  profit  can  be  made  when  it  is  sold  at  60  cents,  producers 
will  take  care  not  to  produce  more  than  can  be  sold  at  that 
price ;  but  if  some  improvement  lowers  the  cost  of  production 
and  so  increases  the  profit,  the  extraordinary  profit  will  draw 
capital  from  other  fields  of  production,  the  supply  of  the  article 
will  be  increased,  and  its  value  and  price  will  fall  until  only  an 
ordinary  rate  of  profit  can  be  secured  from  its  production.  On 
the  other  hand,  if  the  price  of  an  article  is  depressed  through 
an  accidental  increase  of  the  supply,  or  because  of  a  falling  off 
in  the  demand,  so  that  it  sells  for  less  than  its  cost  of  pro- 
duction, certain  producers  will  diminish  their  output  and  thus 
reduce  the  supply  until  the  price  is  restored  to  a  figure  which 
represents  the  cost.  It  is  in  this  simple  way,  through  changes 
in  the  supply  of  goods  automatically  effected  by  competition 
among  producers,  that  the  values  of  most  goods  are  made  to 
conform  to  their  costs  of  production.  Men  are  constantly  seek- 
ing to  employ  their  capital  and  labor  in  those  fields  where 
profits  are  greatest,  —  namely,  where  values  are  furthest  above 
costs.  Hence  the  values  of  all  goods,  so  far  as  they  are  freely 
produced  by  men,  tend  to  an  equilibrium  ;  that  is  to  say,  the 
exchange  ratios  of  goods  tend  to  represent  the  amount  of  capital 
and  labor  which  has  gone  into  their  production. 

Gold  and  silver  are  no  exception  to  this  rule,  but  the  fact 
that  they  are  used  as  money  makes  the  application  of  the  law 
in  their  case  less  simple  and  evident.  When  the  value  of  gold 
or  of  silver  is  much  above  the  cost  of  production,  the  same 
thing  happens  that  happens  when  the  value  of  any  other  com- 
modity rises  above  the  cost ;  when  the  profits  of  gold  mining 
are  high,  capital  and  labor  are  attracted  to  it  from  all  quarters 
of  the  globe.  If  the  price  of  iron  rises,  the  mining  and  smelt- 
ing of  iron  increase.  A  high  price  of  wheat  increases  the  acre- 
age of  the  next  season  ;  a  low  price  reduces  it.  It  is  only  when 
the  law  is  applied  to  the  precious  metals  that  any  one  is  puzzled. 


VALUE  OF  THE  PRECIOUS  METALS 


205 


138.  The  production  of  gold  will  tend  to  increase  when  its 
value  is  rising,  and  tend  to  decrease  when  its  value  is  falling. 
This  truth,  so  easily  understood  when  applied  to  ordinary  com- 
modities, is  obscured  in  the  case  of  gold  by  the  fact  that  gold 
in  this  country  and  in  Europe  has  no  price.    It  is  itself  the 
maker  of  prices  and  seems  independent  of  the  ordinary  laws 
governing  price.    As  we  have  seen,  its  price  seems  fixed  and 
its  value  stable,  so  that  it  does  not  occur  to  the  average  man 
that  the  profits  of  gold  mining  are  affected  in  any  way  by 
changes  in  the  value  of  gold.    He  sees  clearly  enough  that  the 
profits  of  iron  mining   depend  upon  the  price   of  iron,   or  of 
copper  mining  upon  the  price  of  copper  ;  but  the  profits  of  gold 
mining  seem  to  him  to  depend  upon  the  quantity  of  gold  mined 
and  to  vary  as  that  quantity  varies.    The  owner  of  a  copper 
mine  has  his  eye  upon  the  price  of  copper ;  the  farmers  of  Min- 
nesota are  interested  in  the  price  of  wheat  :  it  is  upon  these 
prices  that  their  profits  depend.    But  the  gold  miner  studies  no 
market  report.    He  will  find  the  price  of  gold  published  in  no 
paper.    Is  he  not,  therefore,  in  a  different  position?    Is  he  not 
engaged  in  a  unique  industry,  in  one  the  profits  of  which  are 
independent  of  market  fluctuations  ? 

GOLD  MINERS'   INTEREST  IN  PRICES 

139.  Curiously  enough,  the  gold  miner  is  more  interested  in 
prices,  though  not  consciously,  than  any  other  producer.    He 
is  interested  in  all  prices,  for  the  value  of  his  product  varies 
with  every  change  in  the  prices  of  goods  in  general. 

The  relation  of  the  gold  miner's  income  to  general  prices 
can  be  made  clear  by  illustration.  Let  us  suppose  that  a  man 
owns  a  mine  in  Colorado  from  which  he  is  getting  an  ounce  of 
pure  gold  a  day.  This  gold,  if  we  make  a  slight  deduction  for 
the  expenses  of  shipment,  purification,  etc.,  may  be  supposed 
to  yield  him  $20.  How  is  he  concerned  about  prices  ?  Let  us 
suppose  that  when  he  opened  his  mine  the  prices  of  food, 
powder,  tools,  etc.,  were  such  that  his  expenses  were  $ioa  day. 
His  daily  profit,  therefore,  was  $10.  Suppose  that  during  the 


206  MONEY  AND   CURRENCY 

course  of  three  years  prices  rise  50  per  cent.  His  daily 
expenses  are  now  $15  and  his  net  income  has  been  reduced 
one  half.  If  prices  go  on  rising,  his  profits  will  go  on  decreas- 
ing, until  a  time  will  come  when  he  will  abandon  the  gold  mine 
as  no  longer  profitable,  even  though  in  any  one  day  he  is  able 
to  get  as  much  gold  from  it  as  before.  A  fall  of  general  prices 
would  have  produced  the  opposite  effect  upon  the  miner's 
profits;  he  would  find  his  expenses  steadily  growing  less  and, 
therefore,  his  profit  increasing.  A  rise  of  prices  would  lessen 
the  amount  of  gold  which  he  could  lay  by,  and  also  lessen  its 
value  to  him,  for  its  purchasing  power  would  be  reduced. 

A  fall  of  prices  would  give  him  double  satisfaction;  it  would 
enable  him  to  increase  the  daily  addition  to  his  store  of  gold, 
and  would  also  add  to  its  purchasing  power. 

140.  Falling  prices  lead  to  an  increase  in  the  production  of 
gold;  rising  prices  lead  to  a  decrease  in  the  output.  Since  all 
gold  miners  must  be  affected  the  same  way  as  our  single  miner 
by  changes  in  the  level  of  prices,  it  is  clear  that  a  rise  of  prices 
must  lessen  the  profits  of  gold  mining,  ^and  that  a  fall  of  prices 
must  increase  this  profit.  The  industry  of  gold  mining,  like  all 
industries,  is  carried  on  under  diverse  conditions;  some  mines 
are  very  profitable,  while  others  barely  pay  the  cost  of  operation. 
At  all  times  mines  are  being  worked  which  yield  only  the  ordi- 
nary rate  of  profit,  and  these  are  the  ones  first  to  be  abandoned 
when  prices  rise.  These  may  be  called  the  "marginal"  mines, 
and  the  cost  of  extracting  gold  from  them  is  the  cost  with  which 
the  value  of  gold  tends  to  conform.  As  the  value  of  gold  falls, 
that  is,  as  prices  rise,  the  expenses  of  gold  mining  increase 
and  certain  marginal  mines  are  abandoned.  The  world's  output 
of  gold  being  thus  diminished,  the  rate  of  increase  in  the  world's 
stock  of  gold  receives  a  check,  and  the  downward  tendency  of 
its  value  is  checked.  On  the  other  hand,  when  prices  are  falling 
because  the  demand  for  gold  is  outrunning  the  supply,  poorer 
mines  are  brought  within  the  field  of  profitable  operation  and  a 
gradual  but  steady  increase  of  the  annual  output  sets  in.  Fur- 
thermore, since  falling  prices  are  often  accompanied  by  depres- 
sion in  many  industries,  the  attention  of  men  is  more  than 


VALUE  OF  THE  PRECIOUS   METALS  207 

ordinarily  directed  to  the  profits  of  gold  mining,  and  prospectors 
go  out  in  unusual  numbers  in  search  of  new  mines.  As  a  result, 
a  fall  of  prices  is  usually  followed  not  only  by  an  increased  out- 
put from  old  mines  but  also  by  the  discovery  of  new  fields  of 
gold,  the  yield  from  which  finally  so  augments  the  supply  that 
the  value  of  gold  begins  to  fall  and  the  prices  of  goods  to  rise. 

Metal  money,  therefore,  naturally  results  in  cycles  of  rising 
and  falling  prices.  We  have  found  that  the  value  of  gold  obeys 
a  law  common  to  all  commodities.  There  need  be  but  little  fear 
that  changes  in  the  prices  of  goods  in  the  future  are  to  be  vio- 
lent or  arbitrary  on  account  of  changes  in  the  value  of  gold. 
Unless  men  find  some  new  way  of  getting  gold  from  the  earth, 
or  discover  mines  where  gold  may  be  dug  like  iron  or  coal,  the 
course  of  prices  in  the  future  is  destined  to  be  like  that  in  the 
past,  now  falling  for  twenty  or  more  years,  and  now  rising. 

141.  Although  the  value  of  gold  is  fixed  by  the  same  law 
that  fixes  the  values  of  other  commodities,  its  value  nevertheless 
is  not  so  subject  to  sudden  changes,  for  the  stock  of  gold  in  the 
world  is  so  large  that  the  annual  additions  bear  a  small  pro- 
portion to  the  whole.  It  was  estimated  by  the  United  States 
Director  of  the  Mint  in  1904  that  the  world  possessed  in  a  form 
available  for  monetary  uses  enough  gold  to  coin  $5,500,000,000. 
How  much  gold  exists  in  other  forms  it  is  impossible  to  con- 
jecture, but  it  does  not  concern  the  student  of  money,  for, 
economically  speaking,  it  has  been  consumed;  that  is  to  say, 
an  industrial  use  has  been  made  of  it,  whereby  it  has  acquired 
a  value  that  will  prevent  it  from  being  melted  and  used  as 
money.  In  the  same  way,  if  we  were  to  estimate  the  amount 
of  iron  in  the  country  available  for  manufacture  into  steel 
rails,  we  should  leave  out  of  account  all  iron  which  has  been 
converted  into  agricultural  implements,  hardware,  and  beams 
for  bridges  and  buildings. 

The  world's  output  of  gold  in  1904  was  sufficient  to  coin  about 
$350,000,000,  but  of  this  at  least  20  per  cent  was  absorbed  by 
the  arts,  so  that  about  $280,000,000  was  added  to  the  world's 
monetary  stock.  This  increase  is  equal  to  only  5  per  cent  of 
the  total  stock  and  can  produce  no  great  or  sudden  change 


208  MONEY  AND   CURRENCY 

in  the  value  of  an  ounce  of  gold.  So  long  as  the  world  uses 
gold  as  money  no  sudden  change  in  the  price  level  need  be 
feared,  but  we  must  expect  from  generation  to  generation 
cycles  of  rising  and  falling  prices. 

METHODS  OF  MINING  GOLD 

142.  Since  most  of  the  civilized  nations  of  the  earth  are  now 
using  gold  as  money,  the  outlook  for  its  production  in  the  future 
is  a  matter  of  extraordinary  interest.  When  gold  is  found 
mixed  with  earthy  matter,  as  in  the  beds  of  rivers  or  the  sands 
of  Cape  Nome,  Alaska,  it  is  called  "placer"  gold.  Miners  partly 
detach  the  gold  from  the  dirt  by  "panning"  it,  or  by  "sluicing" 
it  with  running  water,  and  then  by  adding  quicksilver  obtain  an 
amalgam  from  which  the  pure  gold  is  easily  separated.  Most 
of  the  gold  now  in  use  has  been  obtained  in  this  manner.  The 
metal  is  also  found  embedded  in  rock,  sometimes  in  a  pure  state, 
sometimes  in  chemical  combination,  and  in  this  form  is  known 
as  quartz  gold.  The  quartz  is  crushed  and  the  pure  gold  ex- 
tracted with  quicksilver.  When  gold  is  found,  as  it  often  is,  in 
chemical  combination  with  sulphur,  it  is  extracted  by  the  use  of 
either  chlorine  or  cyanide  of  potassium,  for  both  of  which  the 
metal  has  great  affinity.  The  cyanide  process  has  been  employed 
since  about  1890,  and  has  been  partly  responsible  for  the  recent 
great  increase  in  the  earth's  output  of  gold,  for  the  waste  under 
this  process  is  much  less  than  under  any  other.  Gold  is  some- 
times found  in  such  close  association  with  other  metals  that  it 
can  be  extracted  only  by  smelting.  Electricity  has  of  late  been 
found  most  serviceable  both  in  mining  the  ore  and  in  extracting 
the  metal  from  the  crushed  quartz. 

In  the  past  the  business  of  gold  mining  was  more  a  lottery 
than  an  industry;  the  owner  of  a  mine  never  knew  when  his 
"pay  dirt"  would  be  exhausted;  and  it  was  impossible  to  fore- 
tell the  production.  But  the  improved  processes  invented  dur- 
ing the  last  quarter  of  the  nineteenth  century  are  believed 
by  experts  and  special  investigators  to  have  converted  gold 
mining  into  a  stable  industry,  the  sources  of  supply  and  costs 


VALUE  OF  THE  PRECIOUS   METALS  209 

of  operation  being  well  known.  If  this  is  the  case,  the  world 
need  not  fear  any  great  scarcity  of  gold  in  the  future,  or  any 
long  period  of  falling  prices  and  industrial  depression,  for  any 
increase  in  the  value  of  gold  should  promptly  lead  to  an  increase 
of  the  supply.  However,  prophecy  as  to  the  production  of  the 
precious  metals  has  so  often  in  the  past  been  confounded  by 
events  that  we  need  not  take  our  modern  scientific  prophets 
too  seriously. 

The  greatest  gold-producing  countries  in  the  world  to-day 
are  the  United  States,  Australia,  and  the  Transvaal  in  South 
Africa.  In  the  year  1904  the  Transvaal  produced  $86,000,000, 
the  United  States  $84,000,000,  and  Australia  $86,000,000,  — 
these  three  countries  producing  70  per  cent  of  the  world's  total 
output  of  $358,000,000.  In  the  United  States,  Colorado  was 
the  largest  producer,  its  output  being  $28,000,000;  California 
mined  $17,000,000,  Alaska  $8,000,000,  and  South  Dakota 
$7,000,000.  The  output  of  the  Klondike  region  in  Canada 
was  $17,000,000.  Much  is  expected  in  the  near  future  from 
the  gold-bearing  reef  in  the  Transvaal,  which  was  discovered 
about  1885.  It  is  some  forty  miles  in  length  and  is  believed  to 
contain  enough  gold  to  satisfy  the  world's  demand  for  many 
years. 

STATISTICS  OF  PRODUCTION 

143.  The  thirst  for  gold  and  silver,  quite  as  much  as  the 
desire  to  find  a  new  route  to  the  East  Indies,  was  one  of  the 
compelling  motives  that  led  to  the  discovery  and  exploration  of 
the  American  continent.  It  is  estimated  that  at  the  end  of  the 
fifteenth  century  the  world's  monetary  stock  of  precious  metals 
had  dwindled  to  $175,000,000.  The  value  of  both  gold  and 
silver  was  high,  and  the  prices  of  commodities  correspondingly 
low.  William  Jacob,  an  Englishman  who  made  about  1830  a 
careful  study  of  the  meager  data  available,  estimated  that  during 
the  twenty-five  years  following  1492  the  annual  production  from 
America  (mainly  gold)  averaged  $250,000.  The  output  of  Old- 
World  mines  at  this  time  he  puts  at  about  $500,000  a  year. 
The  accidental  discovery  of  the  Potosi  silver  mines  in  1546, 


210  MONEY  AND   CURRENCY 

which  was  almost  coincident  with  the  invention  of  a  process 
for  extracting  silver  from  ores  by  the  use  of  quicksilver,  was 
followed  by  what  seemed  a  fabulous  production,  the  annual 
average  production  of  silver  from  1546  to  1600  being  estimated 
at  over  $10,000,000. 

Throughout  the  seventeenth  century  the  supply  of  silver 
increased  more  rapidly  than  that  of  gold,  but  in  the  eighteenth 
century,  after  the  discovery  of  gold  in  Brazil,  the  production  of 
that  metal  increased  at  the  greater  pace.  Jacob  estimated  that 
in  1492  the  Old- World  production  was  at  the  ratio  of  eighty-nine 
ounces  of  silver  to  eleven  of  gold.  For  the  sixteenth  century 
the  production  ratio  was  3.1  gold  to  96.9  silver;  for  the  seven- 
teenth century,  2.3  to  97.7;  and  for  the  eighteenth,  3.2  to  96.8. 
The  coinage  value  of  the  gold  mined  during  those  three  centu- 
ries was  about  $2,371,000,000,  and  of  the  silver  about  twice 
that  sum,  namely,  $4,863,ooo,ooo.1 

During  the  first  half  of  the  nineteenth  century  there  was  a 
marked  decline  in  the  output  of  gold  and  silver.  Between  1760 
and  1810  the  annual  production  of  both  metals  had  amounted 
to  some  $45,000,000,  whereas  during  the  twenty  years  after 
1810  it  amounted  to  only  $28,000,000.  Gold  discoveries  in 
California  in  1848  and  in  Australia  in  1851  were  followed  by  a 
sudden  and  great  increase  in  the  output  of  gold  during  the 
next  twenty  years,  the  production  averaging  $i  33,000,000  a  year 
between  1850  and  1860,  and  $125,000,000  between  1860  and 
1870.  The  production  of  gold  thereafter  declined  a  little  until 
1889,  averaging  during  the  eighteen  years  following  1870  only 
about  $109,000,000  a  year. 

During  the  great  outpour  of  gold  between  1850  and  1870 
the  production  of  silver  made  little  gain;  for  the  decade  follow- 
ing 1850  it  averaged  only  $37,000,000  per  annum.  But  after 
1870,  while  the  production  of  gold  was  slightly  declining,  that 
of  silver  increased,  the  annual  output  for  the  period  1871- 
1880  being  $92,000,000,  and  during  the  next  decade  $129,- 
000,000. 

1  These  figures  are  Soetbeer's  estimates.  See  Preston's  Precious  Metals  of  the 
United  States,  1894,  p.  113. 


VALUE  OF  THE   PRECIOUS   METALS 


211 


The  next  great  cycle  of  gold  production  began  in  1889,  when 
large  supplies  came  first  from  the  Transvaal  in  South  Africa. 
Soon  afterward  Alaska  and  the  Klondike  began  to  surrender 
their  treasures,  and  the  mines  of  California  and  Colorado  and 
Australia  became  more  productive.  In  1896  the  production  of 
gold  had  reached  $202,000,000;  in  1899,  $306,000,000;  and  in 
1904,  $358,000,000.  War  checked  production  in  the  Transvaal 
in  1898  and  1899,  but  the  South  African  mines  are  now  in 
operation  again,  and  an  increasing  production  is  predicted. 
During  this  period  (1889-1904)  the  production  of  silver  has 
made  little  advance,  the  annual  average  being  $212,000,000 
(coinage  value). 

The  following  table1  sums  up  the  figures  since  1492. 


GOLD 

SILVER 

Annual 

Annual 

Average 

Average 

1500-1800    .... 

$2,371,000,000 

$7,900,000 

$4,863,000,000 

$16,210,000 

1801-1850   .... 

798,000,000 

1  5,960,000 

1,359,000,000 

27,180,000 

1851-1870    .... 

2,596,000,000 

129,800,000 

879,000,000 

43,900,000 

1871-1890   .    .    .    . 

2,211,000,000 

1  10,500,000 

2,2l8,OOO,OOO 

110,900,000 

1891-1900    .... 

2,IOI,OOO,OOO 

2IO,IOO,OOO 

2,089,000,000 

208,900,000 

1901    

262,OOO,OOO 



223,000,000 



IQO2     . 

295,OOO,OOO 

215,000,000 



IQO1 

325,OOO,OOO 



220,000,000 



iywj      . 

IQO4. 

358,000,000 



226,000,000 

^__ 

The  statistics  of  production  are  presented  in  greater  detail 
on  page  213,  in  the  first  four  columns  of  which  the  figures  rep- 
resent millions.  That  table  gives  the  production  both  in  fine 
ounces  and  in  coinage  value,  an  ounce  of  gold  being  valued 
at  $20.67  and  an  ounce  of  silver  at  $1.2929.  This  method 
of  calculating  the  coinage  value  is  inaccurate,  for  it  implies 
that  the  value  ratio  of  the  two  metals  was  16  to  I,  whereas 
that  ratio,  as  shown  in  the  table,  varied  from  10^  to  I  in  the 

1  The  figures  for  1904  are  estimates.  See  "  Financial  Review"  of  Commercial 
and  Financial  Chronicle  (Annual,  1905). 


212  MONEY  AND   CURRENCY 

year  1500  to  40  to  i  in  1900.  The  reader  must  bear  in  mind 
that  the  figures  for  the  sixteenth,  seventeenth,  and  eighteenth 
centuries  are  mere  estimates,  no  reliable  data  of  production 
having  been  preserved ;  and  also  that  during  the  nineteenth 
century  and  at  the  present  time,  from  5  to  10  per  cent  of  the 
gold  and  silver  mined  escapes  the  eye  of  the  statistician.  The 
value  ratio  between  gold  and  silver,  given  in  the  last  column, 
is  that  which  prevailed  at  the  beginning  of  the  respective 
periods. 

PRICES  VARY  WITH  OUTPUT 

144.  Let  us  briefly  examine  the  effects  of  increasing  and 
decreasing  production  upon  the  values  of  the  two  metals.  Dur- 
ing the  next  three  centuries  after  the  discovery  of  America 
both  metals  were  in  common  use  as  money,  silver  probably 
having  the  preference.  During  the  nineteenth  century  down 
to  1870,  although  England  adopted  the  gold  standard  in  1816, 
the  monetary  demand  was  applied  about  equally  to  both  metals. 
Prices,  therefore,  from  1492  to  1870  reflected  the  values  of 
both  gold  and  silver. 

The  new  supplies  of  the  precious  metals  from  America  first 
caused  a  rise  of  prices  in  Spain,  the  country  into  which  the 
greater  portion  was  first  taken.  The  exportation  of  the  precious 
metals  from  Spain  was  made  a  capital  offense,  yet  gradually 
they  were  distributed  over  Europe.  General  prices  in  Europe, 
however,  were  not  affected  until  1570.  Adam  Smith,  indeed, 
estimated  that  prior  to  that  date  the  value  of  silver,  the 
leading  monetary  metal  or  standard  of  the  sixteenth  century, 
rose  a  little ;  but  thereafter  its  value  declined  steadily  and 
rapidly  until  the  end  of  the  seventeenth  century,  when  general 
prices  appear  to  have  been  between  200  and  300  per  cent 
higher  than  in  1492. J 

During  the  eighteenth  century  there  was  no  great  change  in 
the  price  level,  but  in  the  first  half  of  the  nineteenth  century 

1  Thorold  Rogers,  in  his  Six  Centuries  of  Work  and  Wages,  maintains  that 
general  prices  were  not  affected  until  the  end  of  the  sixteenth  century. 


VALUE  OF  THE  PRECIOUS   METALS 


213 


PRODUCTION  OF  GOLD  AND   SILVER  (1492-1902) 
(Six  ciphers  omitted) 


GOLD 

SILVER 

PERCENTAGE  OF  PRODUCTION 

Fine 

Coinage 

Fine 

Coinage 

By  Weight 

By 
Coinage  Value 

Commercial 
Value  Ratio 

Ounces 

Value 
(Dollars) 

Ounces 

Value 
(Dollars) 

Gold 

Silver 

Gold 

Silver 

1  6th  cent. 

24 

502 

734 

949 

3-1 

96.9 

34 

66 

10.5  to  i 

iyth  cent. 

29 

606 

1197 

1548 

2-3 

97-7 

o 
2O 

72 

1  1.8    "    I 

1  8th  cent. 

61 

1263 

1834 

2371 

3-2 

96.8 

34 

66 

15       «    I 

Total 

1500-1800 

114 

2371 

3765 

4863 

2.9 

97.1 

33 

67 

1801-1840 

21 

434 

80  1 

!°35 

2-5 

97-5 

29 

7i 

i  5-3  to  i 

1841-1850 

18 

364 

251 

324 

6.6 

93-4 

52-9 

47.1 

15.7  "  i 

1851-1860 

65 

*333 

288 

!•      372 

18 

82 

78 

22 

'5-5  "  * 

1861-1870 

61 

1263 

392 

507 

13-4 

86.6 

71 

29 

15.3  "  i 

1871-1880 

56 

"Si 

710 

919 

7-3 

92-7 

55 

45 

15.6  "  i 

1881-1885 

24 

496 

460 

595 

5 

95 

45 

55 

18.2  "  i 

1886-1890 

27 

564 

544 

704 

4-7 

95-3 

44 

56 

20.7  "  i 

1891-1895 

39 

814 

788 

1018 

4-7 

95-3 

44 

56 

27      "  i 

1896 

10 

202 

157 

203 

6 

94 

50 

5° 

30.6  "  i 

1897 

ii 

236 

1  60 

207 

6-4 

93-6 

53 

47 

34      "  i 

1898 

14 

287 

169 

219 

7.6 

92-4 

56 

44 

35      "  i 

1899 

IS 

307 

1  68 

218 

8.2 

91.8 

58 

42 

34      "  i 

1900 

12 

255 

174 

224 

6-4 

93-6 

53 

47 

33      "  i 

Total 

1801-1900 

373 

7706 

5072 

6547 

5 

95 

46 

54 

1901 

13 

262 

175 

223 

7 

93 

54 

46 

34.6  to  i 

1902 

14 

295 

1  66 

215 

7-7 

92.3 

58 

42 

39      "  i 

1903 

15 

325 

170 

220 

8.1 

91.9 

59 

4i 

38      "  i 

1904 

17 

358 

175 

226 

8.8 

91.2 

60 

40 

35      "  i 

Total 

1901-1904 

59 

1240 

686 

884 

8 

92 

58 

42 

1492-1904 

546 

n.31? 

9523 

12,294 

5 

95 

48 

52 

214  MONEY  AND   CURRENCY 

the  per  capita  production  of  the  metals  declined  and  their  value 
rose,  prices  falling  some  50  per  cent  between  1810  and  1850. 
The  Australia  and  California  discoveries  led  to  a  fall  in  the 
value  of  gold,  prices  rising  some  30  per  cent  between  1850  and 
1870.  During  the  ten  years  following  1870,  for  reasons  dis- 
cussed in  the  next  two  chapters,  silver  as  a  standard  of  prices 
was  discarded  in  favor  of  gold  by  the  United  States  and  the 
leading  countries  of  Europe.  Thus  an  additional  monetary 
demand  for  gold  was  created  at  a  time  when  its  production  was 
slightly  decreasing ;  its  value  accordingly  advanced  and  prices 
in  all  gold-standard  countries  tended  downward  until  1896, 
when  the  price  level  was  some  50  per  cent  lower  than  in  1870, 
indicating  that  the  purchasing  power  of  an  ounce  of  gold 
had  doubled. 

In  1896  prices,  particularly  in  Europe,  began  to  show  the 
stimulating  effect  of  the  fresh  gold  from  South  Africa,  and 
since  that  date  the  tendency  has  been  upward.  The  Economist 
index  number  rose  from  86  in  1897  to  101  in  1900,  a  rise  of 
17.4  per  cent;  during  1901  it  declined  to  89,  but  then  moved 
up  again,  standing  at  100  at  the  end  of  1903  and  at  97  at  the 
end  of  1904.  The  Sauerbeck  number  rose  from  61  in  1896  to 
75  in  1900,  an  increase  of  nearly  23  per  cent ;  and  the  number 
prepared  by  the  United  States  Department  of  Labor  rose  from 
89.7  in  1897  to  1 10.5  in  1900,  a  rise  of  over  23  per  cent.  Dun's 
index  number,  which  is  weighted  according  to  the  relative 
importance  of  commodities  as  articles  of  consumption  in  the 
United  States,  shows  the  remarkable  advance  of  43  per  cent 
from  the  lowest  point  in  1897  (72.455,  July  i,  1897)  to  the 
highest  since  reached  (103.615,  March  i,  1904). 

Thus  we  find  that  the  movement  of  prices  in  the  past,  as 
theory  would  lead  us  to  expect,  has  been  in  great  cycles,— 
now  a  period  of  increasing  production  of  gold  and  silver  and 
rising  prices,  and  then  a  period  of  falling  prices  consequent  upon 
a  diminished  output  of  the  precious  metals.  The  nineteenth 
century  furnished  four  such  periods,  —  falling  prices  from  1810 
to  1850  and  from  1870  to  1896,  and  rising  prices  from  1850 
to  1870  and  from  1896  to  1900.  That  the  present  upward 


VALUE  OF  THE  PRECIOUS  METALS 


215 


tendency  of  prices  will  be  continued  indefinitely  cannot  be 
expected ;  for  the  time  must  come,  if  prices  continue  their 
upward  course,  when  gold  mines  now  profitable  will  be  aban- 
doned and  the  yearly  increment  to  the  world's  stock  of  gold 
will  grow  relatively  less  and  less,  until  the  value  of  the  metal 
will  increase  and  prices  again  tend  downward.  When  that 
change  will  come  we  can  only  conjecture.  If  the  opinions  of 
mining  experts  are  well  founded,  it  would  seem  that  a  deluge 
of  gold  is  ahead  and  that  prices  in  gold-standard  countries  are 
destined  to  rise  100  per  cent  or  more  during  the  first  quarter 
of  the  twentieth  century,  for  it  is  said  that  at  the  present 
level  of  prices  a  large  part  of  the  world's  output  of  gold  is 
mined  at  a  cost  of  much  less  than  $20  per  ounce.1 

1  Evidently  if  we  only  knew  what  profits  were  now  being  made  in  all  the  gold 
mines  of  the  world,  it  would  be  an  easy  matter  to  discover  the  marginal  mines  and 
determine  how  the  production  of  gold  would  be  affected  by  any  further  uplift  of 
the  general  price  level.  If  we  should  discover  that  most  of  the  gold  now  taken 
from  the  earth  was  got  out  at  a  cost  of  $10  an  ounce,  we  should  have  reason  to 
expect  a  continuation  in  the  present  large  output,  even  though  present  prices 
nearly  doubled.  Unfortunately  we  have  not  the  figures  necessary  for  such  an 
estimate. 

The  following  is  from  a  memorandum  kindly  furnished  in  July,  1905,  by  Hon. 
George  E.  Roberts,  United  States  Director  of  the  Mint. 

The  most  important  gold  field  in  the  world  is  that  of  the  Transvaal,  South  Africa,  and 
for  that  the  data  as  to  product  and  working  costs  is  quite  complete.  The  total  output  for  the 
calendar  year  1904  was  $78,130,728  produced  by  seventy-four  companies  operating  in  the 
Rand  and  outlying  districts.  Their  working  profits,  exclusive  of  the  10  per  cent  tax  on 
profits,  are  reported  at  $26,402,168.  Of  these  companies  only  thirty-five  paid  dividends, 
which  in  all  amounted  to  $19,114,784.70.  The  difference  between  working  profits  and  divi- 
dends is  the  total  of  sums  carried  forward  on  various  accounts,  expenditures  for  enlarged 
operations,  interest,  taxes,  etc.  The  dividend-paying  companies  produced  70  per  cent  of  the 
total  yield.  The  cost  of  production  per  ton  of  rock  handled  was  practically  the  same  as  in 
1898,  but  the  profits  per  ton  were  reduced  from  $4.26  to  $3.46,  owing  to  a  lower  average  grade 
of  ore.  As  the  companies  have  been  hampered  since  the  war  by  a  lack  of  skilled  labor,  it  is 
evident  that  working  costs  would  have  been  reduced  but  for  this  fact,  and  better  results  may 
be  looked  for  this  year. 

Another  field  in  which  a  large  production  is  made  by  comparatively  few  companies, 
and  for  which  statistics  are  available,  is  that  of  West  Australia.  Its  output  in  1904  was 
$40,997,002.  Sixty-seven  West  Australian  companies  are  listed  in  London,  but  I  am  not 
informed  as  to  how  many  contributed  to  the  yield.  Only  sixteen  paid  dividends,  amounting 
to  $5,007,046,  equal  to  about  12^  per  cent  of  the  yield.  The  tendency  of  costs  is  still  down- 
ward in  this  field. 

In  the  United  States  there  are  so  many  producers  in  scattered  fields  with  varying  condi- 
tions that  it  is  difficult  to  obtain  satisfactory  figures.  The  Cripple  Creek  district  is  the  most 
important  one.  Its  total  output  has  been  estimated  by  the  Engineering  and  Mining  Journal 


2l6  MONEY  AND   CURRENCY 


LITERATURE 

WHITE,  Money  and  Banking,  Book  I,  chaps,  iv  and  v  ;  L.  L.  PRICE, 
Money  and  its  Relation  to  Prices;  ADAM  SMITH,  Wealth  of  Nations, 
Book  I,  chap,  ix ;  WILLIAM  JACOB,  An  Historical  Inquiry  into  the 
Production  and  Consumption  of  the  Precious  Metals  (London,  1831); 
ADOLPH  SOETBEER,  Materialen  (translated  from  the  German  by  Professor 
Taussig,  United  States  Consular  Report  No.  87}  ;  JEVONS,  Investigations; 
S.  DANA  HORTON,  Silver  and  Gold  (Cincinnati,  1877);  A.  DEL  MAR,  A 
History  of  the  Precious  Metals  (London,  1880);  annual  reports  of  the 
United  States  Director  of  the  Mint. 


and  the  Colorado  Springs  Mining  Stock  Association  at  $139,000,000  to  January  i,  1905. 
These  figures  include  the  estimates  of  the  State  Bureau  of  Mines  since  1897,  when  they 
became  available.  The  Mining  Investor  of  Colorado  Springs  gives  the  amount  carried  by 
publicly  announced  dividends  of  incorporated  companies  as  approximately  $35,000,000.  It 
says  that  the  profits  of  individual  operators  and  leasers  would  raise  this  materially. 

The  information  I  have  goes  to  show  that  while  some  factors  in  the  cost  of  mining  have 
felt  the  general  influence  of  rising  prices  since  1898,  improvements  in  machinery,  in  metal- 
lurgical processes,  and  in  the  organization  of  working  forces  have  been  going  on,  and  up  to 
date  have  fully  overcome  the  advancing  tendency.  In  all  important  fields  I  think  the  tend- 
ency on  the  whole,  to  this  time,  has  been  toward  lower  costs  per  ton  of  ore  handled. 


CHAPTER  XI 

MONOMETALLISM  vs.  BIMETALLISM 

145.  Shall  one  metal  or  two  metals  be  freely  coined  ?  How  can  there  be  two 
standards  of  prices  ?  146.  The  transference  of  the  money  demand  is  the  essential 
feature  of  bimetallism.  147.  The  money  demand  for  the  metal  does  affect  its  value. 
148.  Bimetallism  dependent  on  the  uncertain  production  ratios  of  the  precious 
metals.  149.  The  argument  that  bimetallism  will  yield  a  more  stable  standard. 
150.  The  advantage  claimed  for  bimetallism  because  of  a  common  par  of  ex- 
change. 151.  The  argument  for  bimetallism  based  on  the  experience  of  France. 
152.  The  monometallist's  criticism  of  this  argument.  153.  Critics  have  failed  to 
take  into  account  the  effect  of  the  French  seigniorage.  1 54.  The  experience  of  the 
United  States  with  bimetallism  does  not  prove  that  international  bimetallism 
would  be  a  failure.  155.  Examination  of  fluctuations  in  the  market  ratio  of  gold 
and  silver  during  the  nineteenth  century.  156.  The  facts  indicate  that  the  French 
monetary  demand  exerted  a  powerful  influence  upon  the  values  of  the  two  metals. 

1 57.  The  fall  of  the  gold  price  of  silver  after  1870  was  due  to  the  appreciation  of  gold. 

158.  The  value  of  silver  did  not  decline  greatly  until  after  1890.     159.  The  uncon- 
scious bimetallism  which  prevailed  before  the  nineteenth  century.    160.  Monomet- 
allism in  England  is  the  outcome  of  unscientific  efforts  to  establish  bimetallism. 

145.  Monometallism  is  a  monetary  system  in  which  only 
one  metal  has  the  right  of  free  coinage.  Bimetallism  signifies 
the  free  coinage  of  two  metals  at  a  fixed  ratio,  the  coins 
of  either  being  legal  tender  as  the  debtor  may  elect.  Coins  of 
other  metals  may  also  be  struck,  and  may  be  legal  tender,  but 
these  are  credit  money,  not  standard  money.  In  a  bimetallic 
system  the  monetary  unit  consists  of  a  certain  weight  of  one 
metal  or  a  certain  larger  quantity  of  another  metal.  For  ex- 
ample, the  first  definition  of  a  dollar  in  the  United  States,  as 
set  forth  in  the  law  of  1792,  described  the  dollar  as  being  either 
371.25  grains  of  pure  silver  or  24.75  grains  of  pure  gold.  The 
law,  of  course,  provided  for  an  admixture  of  alloy,  but  a  dollar 
as  then  defined  meant  two  separate  and  distinct  things.  Bimet- 
allism, therefore,  names  two  standards  of  value  or  price  and  is 
on  that  account  sometimes  called  the  joint  or  double  standard. 

217 


2i8  MONEY  AND   CURRENCY 

But  how  can  there  be  two  standards  of  value  or  price?  Would 
not  bimetallism  necessarily  yield  two  sets  of  prices,  one  repre- 
senting the  value  of  one  metal,  the  other  that  of  the  other 
metal  ?  Is  it  not  as  absurd  to  say  that  a  dollar  may  mean  two 
things  as  it  would  be  to  say  that  a  yard  may  mean  36  inches  or 
39  inches?  How  can  a  double  monetary  standard  be  more  prac- 
ticable than  a  double  standard  of  length  or  of  capacity?  These 
questions  will  at  once  occur  to  the  reader. 

As  various  countries  have  already  tried  bimetallism,  in  our 
discussion  of  it  we  shall  be  able  to  supplement  theory  with 
the  results  of  practical  experience.  Indeed,  mankind  has  had 
more  experience  with  the  joint  standard  than  with  the  single 
standard.  Not  until  the  nineteenth  century  did  any  nation 
definitely  adopt  the  policy  of  monometallism.  In  1816  the  Eng- 
lish Parliament  defined  the  pound  sterling  as  being  113  grains  of 
pure  gold,  and  that  definition  still  holds.  Prior  to  1816  a  pound 
sterling  had  signified  either  a  certain  amount  of  gold  or  a  cer- 
tain other  amount  of  silver.  The  example  of  England  was  not 
followed  by  other  nations  in  Europe,  nor  by  the  United  States, 
until  after  1870.  Prior  to  this  date,  in  most  of  the  countries  of 
the  world,  payments  could  be  effected  in  either  gold  or  silver. 
However,  before  we  study  the  world's  actual  experience  with 
bimetallism,  let  us  consider  the  theoretical  possibility  and  the 
laws  which  must  govern  the  values  of  two  metals  when  either 
may  be  used  as  money. 

146.  The  theory  of  bimetallism  rests  upon  the  following 
hypothesis :  When  two  metals  are  freely  coined  at  a  fixed 
ratio,  the  coins  of  either  being  legal  tender,  the  demand  for 
money  will  keep  the  values  of  the  two  metals  at  the  mint  ratio; 
for  if  one  tends  to  fall  under  that  ratio,  the  total  money  demand 
will  be  transferred  to  it,  so  that  its  value  will  rise  while  the 
value  of  the  other  metal  will  decline. 

By  the  expression  "  mint  ratio  "  is  meant  the  ratio  between 
the  quantity  of  the  two  metals  which  constitutes  respectively 
the  monetary  unit.  Thus  in  1792,  as  the  reader  can  discover 
by  dividing  371.25  by  24.75,  a  silver  dollar  was  fifteen  times 
heavier  than  a  gold  dollar.  The  statute  assumed  that  one  ounce 


MONOMETALLISM  vs.  BIMETALLISM  219 

of  gold  was  worth  as  much  as  fifteen  ounces  of  silver,  and  so 
made  the  mint  ratio  15  to  i. 

The  theory  of  bimetallism  declares  that  the  money  demand 
will  be  applied  to  that  metal  which  happens  to  be  overestimated 
in  the  ratio.  For  example,  if  in  this  country  in  1792  fifteen 
ounces  of  silver  had  been  worth  less  than  one  ounce  of  gold, 
men  would  naturally  have  sought  to  pay  their  debts  by  the  use 
of  silver.  Silver  would  have  been  the  cheaper  money  metal, 
the  increased  demand  for  it  would  have  caused  its  value  to 
rise;  at  the  same  time  the  falling  off  in  the  demand  for  gold, 
since  it  would  not  have  been  wanted  for  use  as  money,  would 
have  caused  its  value  to  decline. 

According  to  the  theory  of  bimetallism,  the  metals  could 
never  widely  depart  from  the  mint  ratio,  for  any  tendency  of 
the  one  to  fall  in  value  would  be  checked  by  the  increased  de- 
mand ;  and  any  tendency  of  either  metal  to  rise  would  be  checked 
by  the  lessening  use  of  it.  Thus,  according  to  the  theory  of 
bimetallism,  two  metals,  if  admitted  freely  to  the  mint,  must 
preserve  a  value  ratio  corresponding  closely  to  the  mint  ratio, 
their  fluctuations  in  value  being  so  slight  that  they  will  not  be 
noticed  by  people  in  general,  although  they  may  yield  some 
profit  to  dealers  in  bullion. 

If  we  grant  the  validity  of  the  law  of  bimetallism,  it  should 
be  noted  that  it  does  not,  strictly  speaking,  yield  a  double 
standard  of  value,  but  an  alternating  standard.  At  one  time 
gold  would  be  the  price  denominator;  at  another  time  silver. 
However,  if  experience  should  prove  that  the  value  ratio  of  the 
two  metals  did  not  fluctuate  appreciably,  but  corresponded 
practically  with  the  mint  or  coinage  ratio,  both  would  be  money 
so  far  as  the  people  in  general  are  concerned,  and  the  standard 
would  be  a  double  one. 

147.  The  soundness  of  the  bimetallic  theory  depends  upon 
two  circumstances:  (i)  Does  the  money  demand  for  a  metal 
have  any  effect  upon  its  value  ?  (2)  Can  the  supply  of  either 
metal  be  so  increased  that,  in  spite  of  the  increased  demand 
for  it  for  use  as  money,  its  value  will  continue  below  the  mint 
ratio  ?  One  of  these  questions  is  theoretical,  the  other  practical. 


220  MONEY  AND  CURRENCY 

The  theoretical  question  we  have  already  considered  in  the 
chapter  on  Metal  Money.  The  free  coinage  of  a  metal  into 
money  undoubtedly  does  increase  the  demand  for  it  and  so 
tends  to  increase  its  value.  The  opponents  of  bimetallism  have 
shown  a  disposition  to  deny  this  proposition,  but  there  is  no 
escape  from  it.  The  money  demand  on  which  the  bimetallists 
harp  is  a  real  demand  and  does  tend  to  increase  the  value  of 
any  metal  to  which  it  is  applied.  If  the  world  should  decide  to 
use  fiat  money  made  of  paper,  based  in  no  way  upon  gold,  the 
value  of  gold  would  undoubtedly  fall,  for  all  the  monetary  stock 
would  be  thrown  upon  the  market  for  use  in  the  arts.  Mining 
operations  would  be  adjusted  to  the  art  demand,  as  now  to  the 
combined  art  and  money  demand ;  less  gold  would  be  needed 
each  year  than  is  now  needed,  and  its  value  would  not  be  great 
enough  to  keep  in  operation  many  of  the  mines  that  are  now 
worked.  Nor  can  it  be  doubted  that  if  several  nations  should 
decide  to  admit  silver  as  well  as  gold  freely  to  their  mints, 
the  demand  for  silver  would  be  greatly  increased  and  a  rise 
in  its  value  would  inevitably  follow. 

148.  We  cannot  give  so  positive  an  answer  to  the  practical 
question.  During  the  past  the  mining  of  gold  and  silver  has 
been  a  most  uncertain  occupation.  We  know  that  the  produc- 
tion of  these  two  metals  follows  the  same  law  as  the  production 
of  other  commodities,  tending  to  increase  as  their  value  rises ; 
but  it  is  not  within  the  power  of  man  to  foresee  the  limit  of 
that  increase,  for  the  amount  of  gold  and  silver  which  the  earth 
contains  is  a  matter  of  conjecture. 

In  favor  of  bimetallism,  however,  the  fact  should  be  noted 
that  at  no  time  in  the  past  has  the  supply  of  either  metal 
increased  with  such  rapidity  that  either  could  have  taken  the 
place  entirely  of  the  other  if  universal  bimetallism  had  pre- 
vailed, or  even  if  half  a  dozen  of  the  leading  nations  of  the  earth 
had  continued  on  the  bimetallic  basis  down  to  the  present  day. 
While  we  can  know  nothing  about  future  possibilities  in  the 
production  of  gold  and  silver,  yet  the  world's  experience  in 
the  past  is  certainly  on  the  side  of  the  bimetallist  in  so  far  as 
this  point  is  concerned.  If  there  were  any  certainty  that  the 


MONOMETALLISM  vs.  BIMETALLISM  221 

production  of  gold  and  silver  in  the  future  would  proceed  on 
lines  resembling  those  of  the  past,  we  should  be  justified  in 
the  conclusion  that  bimetallism  is  theoretically  and  practically 
feasible  if  maintained  at  a  given  ratio  by  several  powerful 
nations. 

Furthermore  it  should  be  noted  that  no  serious  ill  effects 
would  follow  an  attempt  at  international  bimetallism,  even 
though  the  supply  of  one  metal  should  increase  so  rapidly  as 
to  drive  the  other  entirely  out  of  use.  If  a  number  of  power- 
ful nations  should  decide  to  permit  the  free  coinage  of  silver 
and  gold,  either  real  bimetallism  would  ensue,  the  two  metals 
remaining  at  a  value  corresponding  to  the  mint  ratio,  or  one 
metal  would  entirely  disappear  and  monometallism  result.  The 
bimetallist  is  convinced  that  the  second  result  would  not  take 
place,  and  the  monometallist  could  not  complain  if  it  did. 

ADVANTAGES  OF  BIMETALLISM 

149.  Bimetallists  claim  for  their  policy  two  distinct  advan- 
tages over  monometallism,  — (i)  that  it  will  yield  a  more  stable 
standard  of  value,  and  (2)  that  it  will  give  the  world  a  common 
par  of  exchange. 

The  argument  that  bimetallism  will  yield  a  more  stable 
standard  of  value  than  monometallism  is  based  on  the  proba- 
bility that  two  metals  will  not  change  in  value  in  the  same 
direction  and  in  the  same  degree  at  the  same  time.  A  dis- 
covery of  new  gold  mines  may  increase  the  output  of  gold  and 
so  give  its  value  a  downward  tendency,  but  gold  and  silver 
production  are  not  related  and  there  is  no  reason  why  at  the 
same  time  there  should  be  an  increased  output  of  silver.  The 
decline  in  the  value  of  gold,  therefore,  would  be  retarded  some- 
what by  the  reluctance  of  silver  to  follow.  Under  such  circum- 
stances the  money  demand  would  be  transferred  from  silver  to 
gold,  so  that  gold  could  not  fall  in  value  without  dragging  silver 
down  with  it.  Therefore,  a  rise  of  prices  resulting  from  the 
increased  supply  of  gold  would  not  be  so  great  as  it  would  be 
if  gold  alone  were  the  money  metal. 


222  MONEY  AND   CURRENCY 

On  the  other  hand,  if  the  output  of  either  metal  fell  off  so 
that  its  value  tended  to  rise  because  of  a  lessened  supply,  its 
rise  would  be  checked  by  the  transfer  of  the  money  demand 
to  the  other  metal.  The  shifting  of  the  money  demand  from 
one  metal  to  the  other  would  make  changes  in  the  demand 
and  supply  relations  of  each  metal  and  so  affect  the  values  of 
both.  Consequently  a  fall  of  prices  caused  by  the  lessened 
production  of  either  metal  would  not  be  so  great  as  under  a 
monometallic  system. 

A  fall  of  prices  under  bimetallism  would  lead  to  an  increased 
search  for  both  metals,  for  both  would  have  increased  value ; 
furthermore  a  fresh  discovery  of  either  metal  would  tend  to 
check  a  decline  of  prices.  On  the  other  hand,  prices  are  no 
more  likely  to  rise  under  a  bimetallic  system  than  under  a 
monometallic,  for  a  rise  of  prices  would  mean  a  fall  in  the 
value  of  both  metals  and  would  discourage  the  production  of 
both  alike. 

Theoretically,  therefore,  since  stability  of  the  standard  is  the 
most  important  quality  it  can  possess,  the  argument  is  in  favor 
of  bimetallism. 

150.  If  gold  and  silver  bimetallism  were  successfully  main- 
tained by  a  number  of  countries,  the  exchange  relation  between 
the  two  metals  would  be  practically  unchanging,  and  the  pay- 
ment of  balances  between  countries  upon  different  monome- 
tallic standards  would  be  simplified.  At  present  the  exchange 
relations  of  gold  and  silver  are  constantly  fluctuating.  In  coun- 
tries using  silver  as  money  the  price  of  gold  is  changing  from  day 
to  day ;  and  the  same  is  true  of  the  price  of  silver  in  countries 
using  gold  as  money.  If  a  man  in  the  United  States  wishes  to 
buy  goods  in  China,  he  must  do  considerable  figuring  before 
he  can  find  out  just  how  much  gold  he  must  give  for  goods 
quoted  to  him  in  Chinese  money.  If  he  sells  goods  to  China, 
he  will  be  paid  in  silver,  and  he  must  take  into  account  the 
possibility  of  a  decline  in  the  gold  price  of  silver  before  the 
transaction  is  completed. 

Trade  between  countries  having  different  money  standards 
is  not,  however,  so  much  hampered  by  fluctuations  in  relative 


MONOMETALLISM   vs.   BIMETALLISM 


223 


money  values  as  is  often  asserted.  The  risks  of  loss  are  coun- 
terbalanced by  chances  of  profit,  and  both  are  now  assumed 
by  bankers  and  other  dealers  in  foreign  exchange ;  so  that  a 
New  York  exporter,  before  he  ships  a  consignment  of  goods  to 
China,  knows  exactly  how  much  gold  or  New  York  funds  he 
will  receive  for  his  draft  on  the  silver  country.  Stability  of 
relationship  between  the  value  of  gold  and  silver,  while  it  would 
not  greatly  increase  the  trade  between  gold  and  silver  countries, 
would,  nevertheless,  reduce  the  expenses  of  that  trade  some- 
what and  remove  some  of  the  inconveniences  attending  it. 

A  par  of  exchange  between  gold  and  silver  is  desirable,  how- 
ever, less  because  of  its  convenience  to  business  men  and 
traders  than  because  of  the  stimulus  it  would  give  to  the  flow 
of  capital  between  countries  having  different  standards.  Capi- 
tal seeks  the  best  rate  of  profit  and  cares  very  little  about 
geographical  or  political  boundary  lines.  But  men  do  not  like 
to  invest  capital  in  a  country  with  whose  monetary  standard 
they  are  not  familiar.  In  the  United  States,  for  example,  capi- 
talists shrink  from  investments  in  a  silver-standard  country. 
Since  1873  the  gold  value  of  silver  has  declined  50  per  cent, 
and  men  are  fearful  lest  the  decline  may  continue  and  their 
investments  come  back  to  them  in  a  "  depreciated "  money. 
This  fear,  which  discourages  the  investment  of  American  capi- 
tal in  the  countries  of  Central  and  South  America,  would 
not  exist  if  the  exchange  relation  between  gold  and  silver 
were  stable. 

Furthermore  the  experience  of  countries  on  a  silver  basis 
during  the  last  twenty  years  has  not  been  such  as  to  encourage 
in  them  a  disposition  to  borrow  from  countries  on  a  gold  basis. 
Under  the  English  administration  of  India  several  hundred  mil- 
lion pounds  sterling  have  been  borrowed  by  the  Indian  gov- 
ernment for  internal  improvements,  so  that  for  some  thirty 
years  India  has  been  obliged  to  send  to  England  each  year 
the  equivalent  of  ;£  16,000,000  in  gold  in  payment  of  interest. 
Until  1893  India  was  on  the  silver  basis.  As  the  gold  price 
of  silver  fell  in  England  the  silver  price  of  gold  rose  corre- 
spondingly in  India,  becoming  in  1893  double  what  it  was  in 


224  MONEY  AND   CURRENCY 

1873.  India's  remittance  to  England,  consequently,  represented 
twice  as  much  silver  in  1893  as  in  1873.  Since  silver  was  the 
money  of  India,  the  debt  to  England  called  for  twice  as  much 
money  and  necessitated  the  imposition  of  higher  money  taxes. 
It  was  commonly  assumed  in  England  that  the  value  of  silver 
had  fallen ;  but  to  the  people  of  India  it  seemed  that  the 
value  of  gold  had  risen.  Whatever  caused  the  variations  in 
the  value  relations  between  gold  and  silver,  these  variations 
made  India's  position  as  a  debtor  more  difficult  and  tended  to 
discourage  the  negotiation  of  loans  payable  in  gold. 

The  demand  for  indemnity  from  China  by  European  nations 
on  account  of  the  "  Boxer  "  outrages  is  a  more  recent  illustra- 
tion of  the  disadvantage  of  a  lack  of  parity  between  silver  and 
gold.  Very  soon  after  China  had  agreed  upon  the  sum  of 
money  to  be  paid,  the  gold  value  of  silver  fell  and  the  amount 
of  silver  necessary  to  make  the  payment  in  gold  grew  larger. 
The  Chinese  government,  since  that  country  is  on  a  silver 
basis,  estimated  the  amount  of  the  indemnity  in  the  money 
of  China,  and  naturally  objected  to  the  sum  being  increased 
by  what  seemed  to  the  Chinese  mind  a  change  in  the  value 
of  gold. 

FRENCH  EXPERIENCE  WITH  BIMETALLISM 

151.  In  favor  of  bimetallism  it  is  urged  that  experience  has 
proved  it  practicable.  The  bimetallist  points  to  the  experience 
of  France  with  bimetallism  from  1803  to  1873,  and  to  the  fact 
that  during  that  entire  period  the  market  values  of  gold  and 
silver,  despite  great  disparity  in  their  relative  production,  were 
always  near  the  ratio  set  by  the  French  law  of  1803,  which 
provided  for  the  free  coinage  of  gold  and  silver  at  15.5  to  i.  A 
kilogram  of  pure  gold  was  coined  into  3100  francs,  of  which 
the  government  retained  a  seigniorage  of  nine  francs  before  1854, 
and  of  six  francs  for  some  years  thereafter  ;  a  kilogram  of  silver 
was  coined  into  200  francs,  the  government  keeping  as  seignior- 
age three  francs  until  1854,  and  thereafter  one  and  a  half  francs. 
For  seventy  years  France  coined  all  the  gold  and  silver  bullion 


MONOMETALLISM  vs.   BIMETALLISM  225 

that  was  presented  to  its  mint,  and  coins  of  both  metals  during 
most  of  this  period  were  in  concurrent  circulation.  The  market 
values  of  the  two  metals  did  not  always  correspond  with  the 
French  mint  ratio,  but  the  variations  were  not  great  enough  at 
any  time  to  cause  France  to  lose  all  of  its  gold  or  all  of  its 
silver.  After  1864  France  was  in  league  with  several  smaller 
nations  in  Europe,  for  most  of  whom  the  French  mint  furnished 
coins  of  gold  and  silver.  This  league,  known  as  the  Latin 
Union,  embraced  France,  Italy,  Greece,  Belgium,  and  Switzer- 
land, and  the  money  demand  of  these  nations  was  applied  with 
equal  force  to  both  gold  and  silver.  The  nations  now  consti- 
tuting the  German  empire  in  Europe  were  upon  a  silver  basis, 
so  that  all  the  German  demand  was  applied  to  the  white  metal. 
The  money  demand,  however,  of  England  and  Portugal  bore 
upon  gold.  The  French  money  demand  acted  as  a  sort  of  bal- 
ance in  Europe,  bearing  heaviest  upon  that  metal  which  showed 
a  tendency  to  fall  in  value  below  the  coinage  ratio. 

The  bimetallist  claims  that  the  close  correspondence  of  the 
market  ratio  with  the  French  coinage  ratio  was  not  fortuitous, 
but  was  due  to  the  fact  that  the  money  demand  for  the  two 
metals  was  kept  in  equilibrium  by  the  bimetallic  law  of  France. 
Even  after  the  great  influx  of  gold  from  California  and  Aus- 
tralia in  the  fifties,  the  market  ratios  between  the  two  metals 
fluctuated  very  little.  In  the  year  1800  the  earth  was  pro- 
ducing fifty  ounces  of  silver  to  every  ounce  of  gold ;  between 
1852  and  1858  it  produced  only  five  ounces  of  silver  for  every 
ounce  of  gold.  Despite  this  great  change  in  the  production 
ratio,  the  value  ratio  of  the  two  metals  was  only  slightly  affected. 
The  increased  supply  of  gold  after  1850  undoubtedly  tended  to 
lessen  its  value,  and  for  ten  years  the  French  mint  was  busily 
coining  the  yellow  metal ;  large  quantities  of  gold  were  imported 
into  France,  and  large  quantities  of  silver  were  exported  to 
India  and  the  East.  Between  1850  and  1865  there  happened 
in  France  exactly  what  the  theory  of  bimetallism  would  lead  us 
to  expect,  namely,  an  increased  coinage  of  the  cheaper  money 
metal,  gold,  and  a  lesser  use  of  the  other.  However,  France 
did  not  lose  all  of  her  silver  even  under  this  great  strain ;  and 


226  MONEY  AND   CURRENCY 

the  two  metals  of  the  world  retained  during  this  period  a  value 
ratio  remarkably  close  to  the  ratio  established  by  the  law  of 
France. 

152.  The  monometallist  meets  this  argument  from  French 
experience  in  various  ways.    He  first  makes  an  absolute  denial 
of  the  contention  that  the  so-called  "mint  demand"  has  any 
effect  whatever  on  the  value  of  the  metal.    No  mint,  he  says, 
can  add  the  slightest  value  to  any  metal ;  a  mint  merely  puts 
a  stamp  upon  a  coin  to  signify  the  quantity  of  metal  it  con- 
tains, but  if  a  coin  is  hammered  on  an  anvil  its  value  is  not 
lessened.    This  is  true,  but  it  does  not  prove  that  the  value  of 
a  metal  is  not  due  partly  to  the  fact  that  the  mint  is  open  to 
its  coinage.  Free  coinage  makes  the  value  of  the  metal  uncoined 
practically  the  same  as  when  coined,  and  so  tends  to  cause  an 
increased  demand  for  it,  thereby  increasing  its  value.     A  mint 
does  not  add  value  to  the  metal,  but  the  demand  for  it,  grow- 
ing out  of  the  fact  that  it  can  be  freely  minted  into  money,  does 
give  it  a  value  which  it  otherwise  would  not  possess. 

The  monometallist  holds,  furthermore,  that  the  steadiness  of 
the  value  ratio  of  gold  and  silver  between  1800  and  1870  was 
due  not  to  the  French  law  but  to  the  fact  that  there  was  very 
little  addition  to  the  world's  stock  of  either  metal  during  that 
period,  and  very  little  change  in  the  market  demand  for  either. 
According  to  his  view,  it  was  a  mere  coincidence  that  the  values 
of  the  two  metals  remained  comparatively  stable.  The  mono- 
metallist also  points  out  that  between  1803  and  1873  the  mar- 
ket ratio  seldom,  if  ever,  exactly  corresponded  with  the  French 
coinage  ratio.  During  the  greater  part  of  the  period  the  market 
ratio  was  higher  than  15.5  to  I,  silver  being  slightly  overvalued  ; 
but  after  1850,  on  account  of  the  cheapening  of  gold,  the  ratio 
fell  below  15.5  to  i. 

153.  This  lack  of  exact  agreement  between  the  market  ratio 
and  the  French  coinage  ratio  is  regarded  by  some  writers  as  a 
complete  refutation  of  the  bimetallic  theory.    The  monometal- 
list, however,  fails  to  take  into  consideration  a  circumstance 
which  tended  to  keep  the  market  ratio  of  gold  and  silver  always 
a  little  different  from  the  French   coinage  ratio,  namely,  the 


MONOMETALLISM  vs.   BIMETALLISM  227 

seigniorage  exacted  on  French  coins.  Since  a  man  who  took  a 
kilogram  of  gold  to  the  mint  before  1854  received  only  3091 
francs,  the  government  retaining  nine  francs  as  a  tax,  it  is  evi- 
dent that  the  mint  price  of  gold  bullion  in  France  could  have 
been  only  3091  francs.  No  man  in  France  could  exchange  a 
kilogram  of  gold  bullion  for  more  than  this  sum  of  money  unless 
extraordinary  scarcity  of  the  metal  caused  a  great  increase  in 
the  demand  for  it.  A  kilogram  of  silver  bullion  was  coined  into 
200  francs,  but  since  the  government  retained  three  francs,  the 
mint  price  was  only  197  francs.  The  French  mint,  therefore, 
should  have  forced  not  a  ratio  of  15.5  to  I  between  gold  and 
silver  bullion  but  a  ratio  of  19710  3091,  i.e.  i  to  15.69.  This 
is  the  ratio  which  the  market  values  of  gold  and  silver  bullion 
should  have  borne  in  France  if  the  bimetallic  law  were  the 
all-important  factor  in  establishing  their  value.  The  ratio  of 
15.5  to  i  was  the  coinage  ratio;  the  ratio  of  15.69  to  I,  on 
account  of  the  seigniorage  charges,  was  the  corresponding  bul- 
lion ratio.  Curiously  enough,  the  market  ratio  of  gold  bullion, 
during  the  greater  part  of  the  period  when  bimetallism  was  in 
force  in  France,  hovered  about  this  point.  The  fact,  there- 
fore, that  it  seldom  stood  at  15.5  to  i  favors  the  argument  of 
the  bimetallism1 

BIMETALLISM  IN  THE  UNITED  STATES 

154.  The  experience  of  the  United  States  between  1792  and 
1873,  when  this  country  was  legally  upon  a  bimetallic  basis,  is 
frequently  cited  as  evidence  that  bimetallism  is  impracticable. 
In  1792,  following  the  recommendation  of  Alexander  Hamilton, 

1  It  is  worth  noting  that  the  seigniorage  charges  upon  gold  and  silver  rendered 
possible  comparatively  wide  fluctuations  in  value  before  any  profit  could  arise 
from  the  melting  of  coins  of  either  metal.  Since  silver  coins  were  normally  1.5  per 
cent  more  valuable  than  silver  bullion,  the  latter  could  increase  1.5  per  cent  in 
value  with  respect  to  gold  before  the  melting  of  silver  coins  for  export  in  exchange 
for  gold  would  become  profitable.  Nor  would  any  gold  coins  be  exported  unless 
a  kilogram  of  gold  were  worth  more  than  3100  francs.  Thus  there  was  possible 
under  the  French  law  a  fluctuation  of  the  market  ratio  between  15.45  to  i  and 
15.74  to  i  without  any  danger  that  the  coins  of  either  metal  would  be  withdrawn 
from  circulation. 


228  MONEY  AND   CURRENCY 

the  first  Secretary  of  the  Treasury,  Congress  authorized  the  free 
coinage  of  gold  and  silver  at  the  ratio  of  1 5  to  I .  It  was  soon 
discovered,  however,  that  gold  was  worth  more  than  fifteen 
times  as  much  as  silver.  In  1803  the  French  law  authorized 
the  coinage  of  the  two  metals  at  15.5  to  i.  Since  the  French 
law  estimated  gold  more  highly  than  did  the  law  of  the  United 
States,  gold  as  money  was  more  highly  valued  in  France  than 
here,  its  coinage  value  with  respect  to  silver  being  greater.  So 
gold  was  attracted  from  the  United  States  to  France  and  to 
the  rest  of  Europe,  where  the  market  ratio  more  nearly  corre- 
sponded with  the  French  coinage  ratio.  The  United  States,  as  a 
result,  was  unable  to  keep  its  new  gold  money  in  circulation. 
The  only  gold  coins  that  remained  here  were  those  of  foreign 
nations,  which  were  so  worn  that  they  were  worth  less  as  bul- 
lion than  as  coin.  This  attempt  of  the  United  States  to  main- 
tain bimetallism,  therefore,  was  a  failure,  but  the  bimetallist 
can  contend  on  good  grounds  that  its  failure  was  due  to  the 
strength  of  bimetallism  in  France,  and  that  it  illustrates  the 
force  of  the  bimetallic  law  rather  than  its  weakness.  It  might 
be  argued  that  if  the  money  demand  of  the  United  States  had 
been  greater  than  that  of  France  and  the  rest  of  Europe,  our 
bimetallic  law  of  1792  would  have  established  the  value  relation 
between  the  two  metals  and  have  drawn  to  this  country  as  much 
of  both  metals  as  was  required. 

In  1834  the  coinage  law  of  the  United  States  was  changed, 
the  gold  dollar  being  debased  some  7  per  cent.  The  new 
ratio  of  16  to  i,  which  was  thus  adopted,  underestimated  silver. 
It  then  became  more  profitable  to  have  gold  coined  in  the 
United  States  than  to  export  it  to  Europe,  but  the  coinage 
of  silver  in  this  country  became  unprofitable,  for  it  possessed 
a  higher  purchasing  power  in  France  with  respect  to  gold  than 
in  the  United  States.  After  1834,  therefore,  our  silver  was 
exported  to  the  Old  World  and  we  kept  in  circulation  only 
clipped  and  debased  silver  coins. 

The  failure  of  the  United  States  to  maintain  bimetallism  at 
either  of  the  ratios  adopted  cannot  fairly  be  cited  as  an  illustra- 
tion of  the  impotence  of  the  so-called  law  of  bimetallism.  The 


MONOMETALLISM  vs.   BIMETALLISM  229 

United  States  has  had  no  real  experience  with  the  law.  It  was 
impossible  that  this  country  and  France  should  both  maintain 
bimetallism  upon  different  ratios  at  the  same  time;  success  in 
France  made  failure  here  absolutely  certain.  If  the  money 
demand  of  this  country  had  been  equal  to  the  money  demand 
of  France,  i.e.  if  the  same  amount  of  metal  had  been  required 
in  each  country,  the  coinage  of  France  would  have  been  mainly 
gold  and  the  coinage  of  the  United  States  mainly  silver  during 
the  first  period;  after  1834  the  situation  would  have  been 
reversed.  If  the  bimetallic  law  in  this  country  had  provided 
for  the  same  ratio  that  prevailed  in  France,  there  seems  no 
reason  for  doubting  that  bimetallism  would  actually  have  pre- 
vailed in  this  country,  or  that  the  coins  of  both  metals  would 
have  been  in  concurrent  circulation. 


RELATIVE  VALUES  OF  GOLD  AND  SILVER 

155.  Chart  I  on  page  230  presents  graphically  the  value  rela- 
tion maintained  between  gold  and  silver  throughout  the  nine- 
teenth century.  An  upward  movement  of  the  chained  line 
indicates  a  rise  in  the  value  of  silver  with  respect  to  gold,  and 
a  downward  movement  a  decline  in  the  relative  value  of  silver. 
The  figures  at  the  left  indicate  the  gold  price  of  silver  in  the 
United  States  at  the  coinage  ratio  of  16  to  I,  and  the  value 
ratios  of  the  two  metals.  The  dotted  line  at  15.69  marks  the 
ratio  at  which  the  French  law  tended  to  hold  the  two  metals. 
As  the  French  seigniorage  charges  were  reduced  in  1854  from 
nine  to  six  francs  per  kilogram  of  gold,  and  from  three  to  one 
and  a  half  francs  per  kilogram  of  silver,  the  bullion  ratio  corre- 
sponding to  the  coinage  ratio  after  that  year  was  15.59.  The 
heavy  black  line  and  the  heavy  dotted  line  show  respectively 
the  production  of  gold  and  silver  throughout  the  century. 

It  is  impossible  for  an  unprejudiced  person,  it  would  seem, 
to  consider  the  facts  represented  graphically  on  this  chart 
without  coming  to  the  conclusion  that  between  1800  and  1870 
some  extraordinary  force  was  at  work  upon  the  values  of  gold 
and  silver,  tending  to  hold  them  at  a  fixed  relation,  and  that 


230 


MONEY  AND   CURRENCY 


MONOMETALLISM  vs.   BIMETALLISM  231 

this  force  ceased  to  operate  after  1870.  Throughout  most  of 
the  first  period  the  value  ratio  fluctuated  between  15  to  i  and 
16  to  i.  Between  1820  and  1850  it  was  pretty  constantly  a 
little  above  15.69,  the  bullion  ratio  corresponding  to  the  French 
coinage  ratio,  a  fact  indicating  that  the  total  demand  for  gold 
(including  the  monetary  demand  of  France)  was  a  trifle  greater, 
in  proportion  to  supply,  than  the  total  demand  for  silver. 

The  production  of  silver  between  1800  and  1850,  although 
not  large,  considerably  exceeded  that  of  gold.  We  should  nat- 
urally expect,  therefore,  that  silver  would  tend  to  be  relatively 
the  cheaper  metal,  and  that  under  a  bimetallic  system  the  larger 
monetary  use  would  be  made  of  it.  The  statistics  of  the  French 
mint  (see  table  on  page  232)  show  that  during  this  period  the 
coinage  of  silver  amounted  to  $855,600,000,  and  of  gold  to  only 
$267,200,000,  and  that  no  year  passed  without  the  coinage  of 
both  metals.  Even  during  the  three  years  when  the  ratio  was  a 
fraction  above  16  to  i  (1808,  1812,  and  1813)  the  coinage  of  gold 
fell  off  but  little, — a  fact  explicable  undoubtedly  by  the  seignior- 
age charges,  which  made  French  coins  more  valuable  than  bul- 
lion. The  view  of  some  writers  that  the  statistics  of  coinage  in 
France  "  do  not  always  tell  the  story  of  the  operation  of  the 
compensatory  law  "  of  bimetallism,1  because  the  coins  might 
have  been  hoarded  or  sold  upon  the  bullion  market,  is  errone- 
ous, for  French  coins  throughout  this  period  were  usually  worth 
more  as  money  than  as  bullion  and  were  not  sold  upon  the 
bullion  market. 

The  decline  in  the  relative  value  of  silver  after  1816,  when 
the  ratio  moved  toward  16  to  i,  undoubtedly  reflects  an  increase 
in  the  value  of  gold  consequent  upon  England's  adoption  of 
the  gold  standard,  which  caused  a  heavy  drain  upon  the  world's 
stock  of  gold. 

After  1850,  for  twenty  years,  silver  was  relatively  the  dearer 
metal,  and  when  one  notes  the  great  change  in  the  relative 
production  of  the  two  metals,  one  can  only  marvel  at  the  com- 
parative stability  of  their  value  ratio.  Between  1800  and  1850 
the  production  ratio  ranged  between  1.9  to  98.1  and  6.6  to  93.4, 

1  W.  A.  Scott,  Money  and  Banking,  p.  326. 


232 


MONEY  AND   CURRENCY 


the  average  for  the  first  forty  years  of  the  century  being  2.5  to 
97.5,  while  between  1850  and  1860  it  averaged  18.3  to  81.7, 
and  during  the  next  decade  13.5  to  86.5.  Despite  the  great 
outpour  of  gold,  its  value  with  respect  to  silver  declined  but 
little,  the  ratio  never  falling  to  15  to  i. 

156.  The  cause  of  this  wonderful  stability  in  the  value  ratio 
of  gold  and  silver  we  find  in  the  French  statistics  of  coinage. 
The  following  table  gives  in  dollars  the  coinage  of  the  French 
mint  by  decades,  1803  to  I87O.1 


COINAGE  OF  THE  FRENCH  MINT 


GOLD 

SILVER 

1803—1810    .                 

$43,800,000 

$63,200,000 

1811-1820                            .     . 

131,000,000 

154,800,000 

1821     1870 

19,000,000 

213,800,000 

1831—1840    .           .            ... 

35,200,000 

240,400,000 

1841    1850 

38,200,000 

183,400,000 

Total,  1803-1850    .... 

$267,200,000 

$855,600,000 

1851-1860   

$856,600,000 

$52,2OO,OOO 

1861-1870        .     .          ... 

430,200,000 

89,400,000 

Total,  1851-1870   .... 

$1,286,800,000 

$141,600,000 

During  the  first  half  of  the  century,  it  will  be  noticed,  the 
coinage  of  silver  was  more  than  three  times  that  of  gold.  This 
fact  is  sometimes  cited  by  zealous  monometallists  as  evidence 
that  the  bimetallic  law  was  not  operative  and  did  not  influence 
the  values  of  the  two  metals.  Silver,  it  is  said,  was  overvalued  ; 
the  French  coinage  ratio  was  not  the  market  ratio,  and  hence, 

1  Dr.  Pierson,  the  Dutch  economist,  comments  on  these  coinage  statistics  as 
follows:  "From  1803  to  1820  there  were  nine  years  in  which  the  ratio  was 
greater  and  nine  years  in  which  it  was  less  than  15.5;  one  would,  therefore, 
expect  that  the  quantities  of  both  kinds  of  coin  minted  would  be  about  equal ; 
and  so  they  were.  .  .  .  From  1821  to  1847  gold  was  constantly  getting  dearer; 
the  bulk  of  the  money  coined  during  that  period  should  therefore  have  consisted 
of  silver;  and  so  it  did."  —  Economics,  p.  417. 


MONOMETALLISM  vs.   BIMETALLISM  233 

in  obedience  to  Gresham's  law,  gold  flowed  away  from  France 
and  cheap  silver  crowded  into  its  place.  That  seems  a  one- 
sided view  of  the  matter.  The  true  explanation  is  that  gold 
between  1800  and  1850,  for  reasons  already  noted,  tended  to 
rise  in  value  with  respect  to  silver,  but  the  French  monetary 
demand,  being  applied  mainly  to  silver,  checked  that  tendency 
and  held  the  value  ratio  close  to  the  coinage  ratio.  The  market 
values  of  the  two  metals,  instead  of  being  independent  of  the 
French  monetary  demand,  as  is  often  tacitly  assumed,  were 
largely  the  product  of  that  demand.  As  a  principle  operative 
at  this  time,  Gresham's  law  was  subordinate  to  the  law  of 
bimetallism. 

This  conclusion  is  confirmed  by  the  events  of  1851-1870. 
During  this  period  gold  tended  downward  in  value,  but  the 
bimetallic  law  operating  in  France  would  not  suffer  it  to  decline 
except  as  it  dragged  silver  with  it.  The  coinage  of  silver, 
except  for  small  change,  almost  ceased  in  France,  the  entire 
monetary  demand  of  that  country  bearing  upon  the  yellow 
metal,  the  coinage  of  which  amounted  during  this  period  to 
$1,286,800,000.  As  a  result,  the  market  values  of  the  two 
metals  fluctuated  but  little  with  respect  to  each  other.  The  net 
exports  of  silver  from  France  between  1850  and  1870  equaled 
$345,000,000,  and  the  net  imports  of  gold  $1,073,200,000.  The 
people  began  to  suffer  inconvenience  from  lack  of  silver  coins, 
and  France  would  doubtless  have  been  forced  to  debase  its 
subsidiary  silver  coins,  as  did  the  United  States  in  I853,1  had 
the  large  production  of  gold  continued  a  few  years  longer. 

In  so  far  as  facts  can  establish  any  principle  governing  human 
affairs,  the  French  experience  with  bimetallism  seems  to  estab- 
lish the  law  of  bimetallism  and  demonstrate  the  practicability 
of  the  joint  standard.  It  also  proves,  however,  that  bimetallism 
cannot  be  successfully  maintained  by  a  small  group  of  nations, 
their  monetary  demand  not  being  sufficient  to  offset  the  demand 
of  other  nations  or  to  absorb  without  inconvenience  all  the 
stock  of  either  metal  that  may  be  offered. 

1  See  Chapter  XVI,  Section  234. 


234  MONEY  AND   CURRENCY 

FALL  OF  SILVER  AFTER  1870 

157.  Turning  again  to  the  chart  on  page  230,  how  shall  we 
account  for  the  great  and  rapid  decline  in  the  gold  value  of 
silver  after  1870?  This  question  has  been  during  the  last 
twenty  years  the  cause  of  a  controversy  almost  as  hot  as  that 
waged  over  slavery  before  the  Civil  War  ;  and  even  now,  although 
the  battle  has  ended  in  irretrievable  defeat  for  one  set  of  dis- 
putants, it  is  doubtful  if  an  impartial  review  can  be  written  or 
if  such  a  review  would  receive  unprejudiced  hearing.  In  this 
and  the  next  chapter  the  reader  will  find  a  statement  of  the  facts 
involved  and  a  brief  examination  of  the  arguments  employed  on 
both  sides. 

According  to  the  monometallist,  the  ardent  advocate  of  the 
single  gold  standard,  the  fall  in  the  gold  price  of  silver  after 
1870  represented  a  fall  in  the  value  of  silver  due  to  increased 
production  and  lowered  cost.  To  the  retort  that  the  decline 
began  before  the  world's  stock  of  silver  had  been  greatly 
increased,  the  output  of  gold  being  still  much  greater  than  that 
of  silver,  the  monometallist  has  usually  replied  that  the  value  of 
silver  fell  because  of  an  anticipated  increase  of  the  supply, 
transcontinental  railroads  in  the  United  States  having  made 
many  new  mines  accessible. 

By  the  bimetallist  the  fall  of  silver  was  explained  by  a  single 
word,  "demonetization."  In  1871  the  new  German  empire  sus- 
pended the  free  coinage  of  silver,  taking  as  its  monetary  unit 
the  mark  of  5.53  grains  of  gold.  France  and  her  allies  of  the 
Latin  Union,  fearing  lest  they  should  be  flooded  with  Germany's 
silver,  as  they  had  been  between  1850  and  1870  with  Australian 
and  Californian  gold,  suspended  the  free  coinage  of  silver  in 
1874,  their  standard  of  prices  thereby  becoming  the  gold  franc 
of  .2903  grams  (4.4799  grains).  In  1873  Holland  suspended 
the  free  coinage  of  silver,  which  had  been  her  standard  since 
1847,  and  in  1875  definitely  adopted  the  gold  standard,  the  unit 
being  the  gulden  of  9.332  grains  of  gold.  In  1873  the  United 
States,  although  then  on  a  paper  basis,  passed  from  legal  bimet- 
allism to  legal  monometallism,  the  right  of  free  coinage  being 


MONOMETALLISM  vs.   BIMETALLISM  235 

withdrawn  from  silver;  and  in  1875  a  law  of  Congress  ordered 
the  resumption  in  1879  of  specie  payments,  "specie"  meaning 
gold.  Spain  adopted  the  gold  standard  in  1874,  and  Sweden, 
Norway,  and  Denmark  in  1875.  The  transference  of  the  mone- 
tary demand  of  all  these  countries  from  silver  to  gold,  the 
bimetallists  hold,  accounted  for  the  fall  in  the  gold  price  of 
silver ;  it  increased  the  demand  for  gold  and  lessened  the  de- 
mand for  silver,  and  corresponding  changes  of  value  resulted. 

That  the  fall  of  silver  from  $1.30  per  fine  ounce  in  1873  to 
$1.15  in  1880  was  caused  by  the  disuse  of  silver  as  standard 
money,  i.e.  by  its  demonetization,  will  probably  be  admitted 
now  by  many  persons  who  denied  it  a  few  years  ago  in  the  heat 
of  political  controversy.  The  contention  that  silver  was  not 
demonetized  because  all  these  nations  continued  to  coin  silver 
is  not  sound.  Silver  is  not  standard  money  unless  it  is  freely 
coined  ;  when  coined  on  government  account  or  when  the  coin- 
age is  restricted,  silver  coins  are  mere  token  or  credit  money, 
ranking  in  the  same  class  with  coins  of  copper  and  nickel. 

The  notion  that  silver  began  to  fall  in  value  because  of  low- 
ered cost  of  production,  or  because  of  an  anticipated  increase 
of  supply,  must  be  rejected.  So  long  as  a  metal  is  freely  coined 
into  money  only  actual  changes  in  its  supply  can  cause  its  value 
to  fall.  An  increasing  supply,  by  leading  to  a  rise  of  prices, 
may  cause  an  expansion  of  credit  and  so  bring  about  a  fall 
of  value  out  of  proportion  to  the  increase,  but  before  this  can 
happen  there  must  have  been  an  actual  increase. 

Between  1880  and  1889  the  gold  price  of  silver  fell  from 
$1.15  to  $.935  per  ounce.1  This  decline  undoubtedly  repre- 
sented, not  a  fall  in  the  value  of  silver,  but  a  rise  in  the  value 
of  gold,  due  to  what  has  been  called  the  "scramble  for  gold"  by 
the  nations  of  Europe.  During  this  period  Italy,  Austria,  and 

1  When  the  value  ratio  of  gold  is  16  to  I  the  gold  price  of  silver  is  $1.2929  -f  per 
ounce ;  that  sum  being  one  sixteenth  of  $20.67,  tne  sum  into  which  an  ounce  of 
pure  gold  is  coined.  If  the  ratio  rises  to  17  to  i,  the  gold  price  of  an  ounce  of 
silver  is  found  by  dividing  20.67  by  17  ;  and  so  on.  Taking  silver  as  the  base,  we 
reach  the  same  result  as  follows:  since  371.25  grains  of  pure  silver  are  coined  into 
$1.00,  an  ounce  of  silver  (480  grains)  can  be  coined  into  480  divided  by  371.25, 
or  $1.2929  -I-. 


236  MONEY  AND   CURRENCY 

Russia,  which  had  been  for  many  years  on  a  paper  or  fiat  basis, 
began  preparing  for  the  adoption  of  the  gold  standard,  and  pur- 
chased several  hundred  million  dollars'  worth  of  gold.  European 
nations  already  on  the  gold  standard  added  to  their  stocks  of  gold, 
and  the  United  States  increased  its  stock  from  $352,000,000  in 
1880  to  $680,000,000  in  1889  ($26,000,000  less  than  in  1888). 
The  monetary  demand  of  Europe  and  the  United  States  increased 
more  rapidly  during  the  period  1880-1890  than  ever  before 
because  of  the  expansion  of  trade  and  industry  made  possible 
by  the  construction  of  great  railway  systems  during  that  and 
the  preceding  decade.  That  the  supply  of  gold,  the  production 
of  which  was  declining,  did  not  keep  pace  with  the  increasing 
demand  for  it,  and  that  its  value  rose  in  consequence,  is  demon- 
strated by  the  downward  trend  of  prices  in  all  gold-standard 
countries,  beginning  in  1873  and  continuing  until  1896. 

158.  During  the  decade  1890-1900  the  demand  for  silver 
twice  received  artificial  interference.  In  1878  the  United  States 
began  the  coinage  of  two  million  dollars'  worth  of  silver  per 
month  under  the  provisions  of  the  Bland- Allison  law;  in  1890 
the  law  was  changed,  the  monthly  purchases  of  silver  being 
increased  to  4,500,000  ounces  (coinage  value,  $5,818,000). 
It  was  generally  supposed  that  the  law  of  1890,  under  which 
the  government  would  absorb  nearly  all  the  silver  output  of  the 
United  States,  would  permanently  raise  the  value  of  that  metal. 
The  result  was  disappointing.  The  gold  price  of  silver  rose  for 
a  few  months  in  1890,  but  soon  began  to  decline,  and  in  1892 
stood  at  87  cents  as  against  93  cents  in  I889.1  The  second  artifi- 
cial cause  affecting  the  value  of  silver  after  1890  was  the  suspen- 
sion of  its  coinage  by  India  in  1893.  In  the  same  year  the 
United  States  ceased  to  purchase  silver,  the  act  of  1890  being 
repealed.  The  effect  on  the  gold  price  of  silver  was  great  and 
immediate,  the  price  falling  from  78  cents  in  1893  to  63  in 
1894.  In  1902  the  gold  price  of  silver  had  fallen  to  52  cents 
per  ounce.  During  the  next  three  years  silver  rose  in  value, 
the  price  in  1905  being  60  cents. 

JThe  silver  legislation  of  1878  and  1890  is  considered  in  more  detail  in 
Chapter  XVI. 


MONOMETALLISM  vs.   BIMETALLISM  237 

UNCONSCIOUS  BIMETALLISM  BEFORE   1800 

159.  Prior  to  the  nineteenth  century  what  might  be  called 
unconscious  bimetallism  prevailed  in  most  of  the  countries  of 
the  world.     Silver  and  gold  were  both  regarded  as   precious 
metals,  and  either  was  employed  for  coinage  purposes  according 
to  the  whim  or  convenience  of  sovereigns.     It  was  imperfect 
bimetallism,  for  trade  in  the  precious  metals  was  greatly  restricted 
by  law,  and  their  coinage  was  not  free,  as  at  present.    Not  until 
1666  did  English  law  grant  the  right  of  free  and  gratuitous  coin- 
age to  the  people  ;  previously  it  had  been  a  prerogative  of  the 
sovereign.    Coins  were  frequently  worth  more  than  the  metal  of 
which  they  were  composed,  yet  there  was  constant  tendency 
toward  equivalence  of  value,  for  the  coins  of  one  country,  as  a 
rule,  were  current  in  other  countries,  so  that  the  supply  of  money 
was  in  the  long  run  regulated  by  the  value  of  the  metals. 

Great  looseness  of  ideas  prevailed  with  respect  to  the  nature 
and  value  of  money.  Prior  to  the  nineteenth  century  the  com- 
pensatory action  of  the  law  of  bimetallism  does  not  appear  to 
have  been  understood  or  even  discussed  ;  nor  was  there  any  ap- 
preciation of  the  fact  that  the  value  of  the  precious  metals  was 
affected  by  their  use  as  money.  The  simple  principle  known 
as  Gresham's  law,  which  explains  only  certain  phenomena  of 
bimetallism,  seems  to  have  been  the  only  bimetallic  principle 
that  had  been  grasped  by  students  or  finance  ministers.  There 
was  no  recognition  of  the  necessity  for  a  common  ratio  for  the 
coinage  of  gold  and  silver,  and  consequently  two  neighboring 
states  would  coin  the  metals  at  different  ratios  and  then  attempt 
by  law  to  keep  both  metals  in  circulation.  Frequent  debasement 
of  the  coinage  by  the  petty  rulers  of  Europe,  who  in  this  way 
robbed  their  people,  added  to  the  confusion. 

1 60.  England's  monetary  evolution  furnishes  a  good  illustra- 
tion of  unconscious  cerebration  in  finance.     The  law  definitely 
establishing  bimetallism  in  1666  fixed  a  ratio  which  undervalued 
silver  as  compared  with  the  ratios  prevailing  upon  the  conti- 
nent.   England  was  therefore  unable  to  keep  any  of  her  new 
silver  coins  in  circulation.    In  spite  of  a  law  providing  capital 


238  MONEY  AND   CURRENCY 

punishment  for  any  person  melting  or  exporting  coins,  all  the 
new  silver  was  sent  across  the  Channel.  The  hardship  suffered 
by  the  shopkeepers  and  people  of  England  generally  on  account 
of  the  scarcity  of  small  change  is  picturesquely  described  in 
chap,  xxi  of  Macaulay's  History  of  England.  In  1696  Par- 
liament sought  to  remedy  the  monetary  evils  by  a  recoinage. 
At  that  time  the  only  silver  coins  in  circulation  were  the  old 
coins  of  the  realm,  which  were  so  clipped  and  worn  that  their 
bullion  value  was  no  greater  than  their  money  value.  The 
question  at  once  arose,  Shall  the  recoinage  of  silver  be  upon  the 
basis  of  these  light-weight  silver  coins,  the  average  depreciation 
of  which  was  estimated  at  25  per  cent,  or  upon  the  basis  of  the 
law  of  1666,  which  provided  for  the  heavier  coin  ?  This  question 
excited  a  memorable  controversy,  in  which  the  two  most  impor- 
tant figures  were  John  Locke,  the  distinguished  philosopher, 
and  Sir  William  Lowndes,  Secretary  of  the  Treasury.  Lowndes 
recommended1  that  the  denomination  of  all  silver  coins  should 
be  raised  25  per  cent;  that  the  shilling,  for  example,  should  be 
equal  to  15  pence  instead  of  12.  His  proposal  was  tantamount 
to  the  adoption  of  the  continental  coinage  ratio,  but  in  his  argu- 
ment he  did  not  take  advantage  of  this  fact.  His  recommenda- 
tions were  rejected,  and  those  of  Locke,  who  advised  strongly 
against  any  debasement  of  the  coinage,  were  adopted. 

It  has  been  commonly  assumed  that  the  weight  of  the  argu- 
ment lay  with  Locke  and  that  the  adoption  of  his  plan  was 
a  triumph  for  honest  money.  It  is  not  clear,  however,  that 
Lowndes  was  in  the  wrong,  or  that  his  plan  involved  debase- 
ment. Since  the  new  silver  coins,  if  rated  with  gold  as  he 
recommended,  would  have  had  a  money  value  corresponding 
with  their  bullion  value,  they  would  have  remained  in  circu- 
lation ;  and  since  business  contracts  had  been  made  on  the 
basis  of  the  old  silver  currency,  creditors  would  not  have  been 
defrauded  when  compelled  to  take  the  new  coins  at  a  higher 
ratio. 

1  Lowndes'  proposals  are  found  in  his  Reports  containing  an  Essay  for  the 
Amendment  of  the  Silver  Coins,  London,  1696.  Locke's  reply  is  entitled  Further 
Considerations  concerning  the  Raising  the  Value  of  Money. 


MONOMETALLISM  vs.  BIMETALLISM  239 

The  outcome  of  the  recoinage  was  not  encouraging.  At  great 
expense  England  put  her  mint  to  work  to  provide  the  country 
with  a  new  stock  of  silver  money,  but  there  was  no  power  in 
England  strong  enough  to  keep  it  there,  for  silver  with  respect 
to  gold  had  a  higher  value  as  money  on  the  continent  than  it 
had  in  England. 

In  1717  England  again  changed  the  coinage  ratio  between 
gold  and  silver,  but  did  not  give  silver  the  rating  which  it  had 
at  the  continental  mints.  Thus  England,  although  nominally 
upon  a  bimetallic  basis  during  the  eighteenth  century,  was  really 
upon  a  gold  basis  ;  and  the  English  Parliament,  when  it  form- 
ally adopted  the  gold  standard  in  1816,  merely  put  into  law 
what  had  been  the  custom  for  over  a  hundred  years.  Gold  had 
become  the  money  of  England,  not  because  of  any  reasoned  or 
conscious  preference  in  the  beginning,  but  because  of  the  inability 
of  English  financiers  to  comprehend  the  laws  governing  the  use 
of  two  metals  as  money. 

Attention  has  been  called  to  the  chaotic  condition  of  the 
European  money  systems  prior  to  the  nineteenth  century,  and 
to  the  apparent  lack  of  any  conscious  systematic  effort  to 
attain  real  bimetallism,  because  the  opponents  of  bimetallism 
seem  to  draw  unfair  conclusions  from  the  monetary  confusion 
which  then  prevailed.  Anything  like  real  bimetallism  must 
have  been  impossible  prior  to  the  nineteenth  century;  for  dif- 
ferent nations  were  coining  gold  and  silver  at  different  ratios, 
and  thus  the  nations  in  which  the  money  demand  was  weakest 
were  certain  to  be  stripped  of  one  or  the  other  of  these  metals. 
The  advantages  of  bimetallism  can  never  be  attained  unless  a 
group  of  the  most  powerful  nations  agree  to  coin  gold  and  sil- 
ver at  the  same  ratio.  That  such  an  agreement  would  bring  to 
bear  upon  these  metals  a  demand  strong  enough  to  keep  them 
at  the  ratio  agreed  upon  is  morally  certain.  The  value  rela- 
tion between  the  two  would  be  linked  by  a  bond  that  could  not 
be  broken  except  by  an  increase  in  the  supply  of  the  metals  far 
beyond  anything  the  world  has  ever  yet  seen. 

Since  1900,  however,  these  theoretic  considerations  have  pos- 
sessed no  practical  importance,  for  the  increase  in  the  output 


240  MONEY  AND   CURRENCY 

of  gold  has  given  gold-using  nations  such  an  abundance  of 
money,  and  caused  such  a  rise  of  prices,  that  international 
bimetallism  as  a  political  issue  is  dead.  In  1905  the  problem 
is,  not  how  to  keep  prices  from  falling  but  how  to  guard 
against  the  intoxicating  influence  of  rising  prices. 

LITERATURE 

Supporting  monometallism :  HORACE  WHITE,  Money  and  Banking; 
R.  GIFFEN,  The  Case  against  Bimetallism;  J.  L.  LAUGHLIN,  History  of 
Bimetallism  in  the  United  States  and  Facts  about  Money;  T.  H.  FARRER, 
Studies  in  Currency  ;  A.  B.  HEPBURN,  History  of  Coinage  and  Currency 
in  the  United  States ;  H.  D.  MACLEOD,  Bimetallism ;  J.  SCHOENHOF, 
History  of  Money  and  Prices;  W.  A.  SHAW,  History  of  Currency,  1252- 
1894;  Sound  Currency  (publications  of  New  York  Reform  Club). 

Supporting  bimetallism  :  E.  HELM,  The  Joint  Standard;  F.  A.  WALKER, 
International  Bimetallism;  A.  DANA  HORTON,  Silver  and  Gold,  The 
Silver  Pound,  and  Silver  in  Europe ;  J.  S.  NICHOLSON,  A  Treatise  on 
Money ;  L.  L.  PRICE,  Money  and  its  Relation  to  Prices ;  WHARTON 
BARKER,  Bimetallism;  E.  B.  ANDREWS,  An  Honest  Dollar. 

General  treatises:  L.  DARWIN,  Bimetallism  (London,  1897);  W.  S. 
JEVONS,  Money  and  the  Mechanism  of  Exchange;  H.  P.  WILLIS,  A  His- 
tory of  the  Latin  Monetary  Union. 


CHAPTER   XII 
THE  SILVER  QUESTION 

161.  Events  that  led  to  the  agitation  for  the  free  coinage  of  silver  in  1896. 
162.  The  arguments  presented  by  the  champions  of  silver.  163.  The  gold  stand- 
ard held  responsible  for  the  evil  of  falling  prices.  164.  Fundamental  defects  of 
the  theory  of  money  upon  which  the  case  for  silver  was  based.  165.  Falling 
prices  quite  as  probable  under  silver  monometallism  as  under  gold  monometal- 
lism. 1 66.  A  statistical  inquiry  into  the  value  variations  of  gold  and  silver  after 
1870.  167.  It  would  appear  that  silver  did  not  decline  in  value  between  1873  ar|d 
1893,  and  that,  therefore,  it  was  more  stable  than  gold.  But  during  this  period 
special  causes  were  at  work.  168.  Fluctuations  in  the  gold  price  of  silver  do  not 
prove  that  it  lacks  stability  of  value.  169.  The  silver  partisan  magnified  the 
burden  imposed  on  debtor  classes  by  an  appreciating  standard.  170.  Inconsist- 
ent arguments  advanced  by  the  defenders  of  the  gold  standard.  171.  Why 
the  free  coinage  of  silver  would  have  caused  a  large  importation  of  silver. 
172.  The  contention  that  the  free  coinage  of  silver  would  increase  the  foreign 
trade  of  the  United  States  will  not  bear  analysis.  173.  The  free  coinage  of  silver 
would  probably  have  worked  injury  to  the  laboring  classes.  174.  The  argument 
based  on  India's  apparent  control  of  the  wheat  market  after  1873.  175.  When 
two  countries  are  using  different  metals  as  money  a  fall  in  the  value  of  either 
temporarily  affects  the  trade  of  both.  176.  Present  outlook  for  the  use  of  silver 
as  standard  money. 

161.  During  the  last  twenty-five  years  of  the  nineteenth 
century  the  sharp  fall  in  prices  which  followed  the  general 
suspension  of  the  free  coinage  of  silver  in  the  United  States 
and  Europe  made  the  money  question  a  political  issue  in  almost 
every  country  whose  monetary  unit  was  gold.  The  "  silver 
question  "  now  possesses  no  political  importance,  for  the  rise 
of  prices  since  1897  has  destroyed  the  main  argument  upon 
which  the  movement  for  the  free  coinage  of  silver  was  based. 
An  examination,  however,  of  some  of  the  arguments  that  were 
advanced  for  and  against  the  remonetization  of  silver  is  worth 
while,  for  it  serves  to  show  the  student  of  the  money  question 
how  theoretical  principles  may  be  applied  in  the  solution  of  a 
practical  problem. 

241 


242  MONEY  AND   CURRENCY 

We  will  briefly  review  the  admitted  facts.  As  explained  in 
the  last  chapter,  after  1870  the  United  States  and  most  of  the 
nations  of  Europe  suspended  the  free  coinage  of  silver.  In 
this  country  the  act  of  1873,  by  which  the  demonetization  of 
silver  was  effected,  attracted  no  public  attention  at  the  time ; 
it  was  primarily  intended  as  a  codification  of  our  coinage  laws, 
and  was  not  generally  regarded  as  having  far-reaching  signifi- 
cance.1 The  country  was  then  upon  a  fiat-money  basis,  the 
depreciated  greenback — then  at  a  discount  of  14  per  cent  as 
compared  with  gold  —  being  the  standard  of  prices.  No  metal 
money  was  in  circulation.  Even  before  the  greenback  period, 
silver  having  been  underestimated  in  the  bimetallic  law  of 
1834,  there  were  few  silver  dollars  in  the  country.2  Naturally, 
therefore,  the  failure  of  the  act  of  1873  to  mention  the  silver 
dollar  attracted  no  general  notice  and  caused  little  discussion. 

In  1873  the  gold  price  of  silver  averaged  $1.297,  and  a  sil- 
ver dollar  of  371.25  grains  was  worth  a  little  more  than  a  gold 
dollar.  After  1873  the  gold  price  of  silver  almost  steadily 
declined,  until  in  1896  it  sold  at  67  cents,  a  price  represent- 
ing a  value  ratio  of  31  to  I.  At  the  same  time  the  prices  of 
commodities  also  fell.  The  Falkner  index  number  of  prices  in 
the  United  States  in  1872  stood  at  127  figured  in  gold.  In  1891 
this  index  number  stood  at  92,  and  between  1891  and  1896 
there  was  a  further  fall  of  prices  of  about  25  per  cent.  The 
total  change  in  the  price  level  between  1873  and  1896  amounted 
to  nearly  50  per  cent  in  all  countries  using  gold  as  the  basis  of 
their  monetary  systems.  For  example,  in  1873  the  greenback 

*The  act  of  1873  declares  that  the  gold  dollar  of  25.8  grains  standard  "shall 
be  the  unit  of  value."  After  enumerating  the  various  gold  coins  that  may  be 
minted,  it  provides  for  the  free  coinage  of  silver  "  trade  dollars,"  to  contain  420 
grains  standard  silver,  and  for  the  coinage  by  the  government  of  subsidiary  silver 
coins,  all  these  to  be  legal  tender  only  for  amounts  not  exceeding  $5.00.  The  old 
silver  dollar  of  412.5  grains  standard  is  not  mentioned  ;  its  coinage,  therefore,  was 
prohibited  by  the  following  :  "  That  no  coins,  either  of  gold,  silver,  or  minor  coin- 
age, shall  hereafter  be  issued  from  the  mint  other  than  those  of  the  denomina- 
tions, standards,  and  weights  herein  set  forth." 

2  Only  8,031,238  silver  dollars  were  coined  between  1792  and  1873,  an<^  most 
of  these,  for  reasons  explained  in  Chapter  XVI,  were  immediately  melted  or 
exported. 


THE  SILVER  QUESTION  243 

price  of  wheat  averaged  $1.73  per  bushel,  which  made  the 
gold  price  about  $1.52  ;  in  1894  its  average  price  in  gold  was 
6 1  cents.  The  prices  of  other  agricultural  commodities  suf- 
fered a  corresponding  decline.  The  prices  of  manufactured 
articles  also  fell,  but  the  reduction  here  was  by  no  means  uni- 
form, the  prices  of  many  manufactured  articles  being  sustained 
\)y  combinations  among  manufacturers,  by  patents,  and  by 
tariff  changes. 

The  rate  of  interest  during  these  years  also  declined,  as 
shown  in  a  preceding  chapter.  The  rates  charged  upon  farm 
mortgages  were  less  affected  than  those  paid  by  business  men 
and  by  large  corporations  which  sold  bonds  to  the  investing 
public.  For  example,  the  average  rate  on  double-name  paper 
in  New  York  in  1872  was  6  per  cent,  while  in  1895  it  was  2 
per  cent ;  and  railroads  which  borrowed  money  at  7  and  8  per 
cent  in  the  seventies  were  able  to  refund  their  indebtedness 
at  4  and  5  per  cent  in  the  eighties. 

THE  ARGUMENT  FOR  SILVER 

162.  Let  us  first  hear  the  case  of  the  silver  man.  His  theory 
of  money  was  simple  and  easily  understood.  He  held  that  the 
value  of  money  varied  with  its  quantity,  and  that  the  value  had 
risen  and  prices  fallen  after  1873  because  the  law,  by  the 
demonetization  of  silver,  had  reduced  the  country's  money 
supply  by  one  half.  The  fall  in  the  gold  price  of  silver  he 
attributed  entirely  to  the  demonetization  of  silver,  and  he  held, 
therefore,  that  if  silver  were  again  admitted  freely  to  the 
mints,  its  price  would  immediately  rise  to  a  parity  with  gold  at 
the  ratio  of  16  to  I.  The  demand  for  money  he  regarded  as 
practically  infinite  in  strength ;  as  being  strong  enough  to  lift 
any  metal  to  the  value  given  it  by  a  bimetallic  law.  In  support 
of  this  position  he  was  able  to  quote  the  great  philosopher, 
John  Locke,  who  had  declared  that  the  "vent,"  or  market,  for 
money  was  infinitely  great;  and  also  John  Stuart  Mill,  the 
leading  English  political  economist,  who  had  said  that  all 
the  goods  in  the  market  constituted  the  demand  for  money. 


244  MONEY  AND   CURRENCY 

The  silver  man  showed  that  throughout  all  the  centuries  during 
which  its  free  use  as  money  had  been  permitted  silver  had 
maintained  a  comparatively  stable  value  relation  with  gold. 
Some  of  the  more  enthusiastic  silver  agitators,  pointing  to  the 
fact  that  the  mines  of  the  earth  had  for  several  centuries 
yielded  about  sixteen  times  as  much  silver  as  gold,  con- 
tended that  the  two  metals  existed  in  the  bowels  of  the  earth 
in  this  ratio,  and  that  the  country  in  abandoning  this  natural 
ratio  was  flying  in  the  face  of  Providence.  Although  the  gold 
price  of  silver  in  1896  was  only  67  cents  an  ounce,  which 
made  an  ounce  of  gold  worth  thirty-one  ounces  of  silver,  it 
was  claimed  that  the  remonetization  of  silver  would  bring 
upon  it  such  a  powerful  demand  that  its  value  would  rise  to 
$1.29  per  ounce,  the  price  which  represents  parity  at  16  to  I. 

163.  The  single  gold  standard  was  attacked  in  several  differ- 
ent ways.  It  was  held  to  be  altogether  responsible  for  the  fall 
of  prices  which  set  in  after  1873.  The  silver  men  made  the 
most  ingenious  and  effective  use  of  the  evil  results  of  this  fall 
of  prices.  They  caused  discontent  among  the  farmers  by  tell- 
ing them  that  it  had  been  brought  about  by  conspiracy  among 
their  "gold-bug  creditors"  in  New  York  and  London  in  order 
that  the  value  of  the  gold  they  received  upon  their  bonds  and 
mortgages  might  be  increased.  A  western  farmer  struggling 
to  lift  a  mortgage  was  easily  made  to  see  that  the  burden  of 
his  debt  had  been  increased  by  the  decline  in  the  price  of  farm 
products.  "The  crime  of  1873,"  as  the  law  of  that  year  was 
called,  was  injuring  him,  he  was  told,  in  the  same  way  that  an 
enlargement  of  the  bushel  would  hurt  him  if  he  were  under 
contract  to  deliver  through  a  series  of  years  a  certain  number 
of  bushels  of  wheat. 

The  farmer  was  also  invited  to  consider  how  difficult  the 
payment  of  the  national  debt  was  becoming.  At  the  end  of  the 
Civil  War  it  amounted  to  $2,800,000,000  and  might  then  have 
been  paid  with  1,400,000,000  bushels  of  wheat,  which  was  worth 
at  that  time  $2.00  a  bushel.  This  national  debt  was  mainly  in 
the  form  of  bonds  which  the  government  had  sold  for  green- 
backs worth  only  fifty  cents  on  the  dollar  in  gold.  Owing  to  the 


THE   SILVER   QUESTION  245 

conspiracy  among  the  "gold  bugs"  of  the  East,  Congress  had 
enforced  the  payment  of  these  bonds  in  gold,  so  that  the  gov- 
ernment was  paying  back  to  its  creditors  twice  as  much  as  it 
had  received. 

But  this  was  not  all,  for  that  same  conspiracy  had  increased 
the  value  of  gold  itself.  The  real  wealth  of  the  country  lies  in 
such  commodities  as  wheat.  The  gold  payments  already  made 
on  account  of  the  national  debt  had  been  sufficient  to  buy,  at  the 
prices  prevailing  when  the  payments  were  made,  4,000,000,000 
bushels  of  wheat,  an  amount  nearly  three  times  as  great  as  the 
original  debt  when  figured  in  wheat.  Nevertheless  the  debt  had 
not  been  paid,  for  there  remained  still  due  $1,500,000,000, 
which  represented,  at  the  then  low  price  of  wheat,  3,000,000,000 
bushels,  or  over  twice  as  much  as  was  owed  in  the  beginning. 

It  is  not  strange  that  this  reasoning,  which  made  the  debt  in 
goods  grow  in  spite  of  the  fact  that  it  had  been  twice  paid, 
should  have  a  powerful  influence  upon  the  agricultural  popu- 
lation. Wheat  was  not  the  only  agricultural  product  that  had 
fallen  in  price.  The  price  of  almost  everything  that  the  farmer 
could  raise  for  the  market  had  been  cut  in  two.  The  advocates 
of  silver  held  that  its  free  coinage  would  cause  a  tendency  of 
prices  upward,  and  that  this  would  atone  for  the  injustice 
worked  by  the  fall  of  prices  after  1873.  It  was  only  fair,  they 
argued,  that  the  debtor  who  had  been  robbed  should  now  get 
back  some  of  his  due. 

A  different  argument  was  addressed  to  the  laboring  classes 
of  large  cities.  The  three  years  following  the  panic  of  1893 
had  been  marked  by  great  industrial  depression.  The  chari- 
table societies  of  all  the  large  cities  of  the  United  States 
had  been  taxed  to  the  utmost  to  provide  food  and  shelter  for 
men  who  could  get  no  work.  The  silver  men  attributed  the 
panic  of  1893  to  the  scarcity  of  money  and  held  that  the 
depression  of  industry  was  a  direct  result  of  the  fall  of  prices. 
A  government  report  in  1891  had  stated  that  the  rate  of  wages 
was  as  high  in  1891  as  it  was  in  1873.  "Of  what  advantage," 
asked  the  silver  man,  "is  a  high  rate  of  wages  to  a  laboring 
man  out  of  a  job  ?  Industry  is  starving  for  lack  of  money. 


246  MONEY  AND   CURRENCY 

Nothing  will  open  the  factories  and  mills  but  an  increase  in  the 
money  supply,  which  will  set  capital  in  motion  and  give  work 
to  the  people." 

To  business  men,  as  well  as  to  farmers  and  producers  gener- 
ally, the  silver  advocate  addressed  an  argument  based  upon  the 
apparent  prosperity  of  India.  India  had  become  our  chief  com- 
petitor in  the  wheat  markets  of  the  world.  Until  1893  her 
money  had  been  silver,  and  the  friend  of  silver  held  that  the 
wheat  growers  of  India,  on  account  of  the  falling  price  of  silver, 
had  been  able  to  undersell  the  farmers  of  the  United  States  at 
Liverpool  year  after  year,  without  themselves  making  any 
change  whatever  in  the  price  of  their  wheat.  The  Indian 
exporter  of  wheat,  who  sold  it  at  from  three  to  four  rupees  1 
per  bushel  in  1873,  had  averaged  the  same  price  during  the  full 
twenty  years,  and  with  the  money  he  had  received  he  had  each 
year  been  able  to  buy  about  the  same  quantity  of  goods  or  pay 
the  same  amount  of  debt,  for  general  prices  did  not  rise  in 
India  prior  to  1893.  But  four  rupees  of  silver  after  1873  rep- 
resented a  lessening  amount  of  gold,  so  that  an  American 
farmer,  in  order  to  compete  with  the  Indian  producer,  had  been 
obliged  to  lower  his  price  year  after  year.  Thus,  when  the 
price  of  silver  had  fallen  until  a  rupee  of  165  grains  of  pure 
silver  was  worth  only  30  cents  in  gold,  the  American  farmer 
in  order  to  compete  with  Indian  wheat  at  three  rupees  was 
obliged  to  sell  his  wheat  at  90  cents.  The  advocates  of  the 
free  coinage  of  silver,  using  illustrations  of  this  sort,  argued 
that  the  adoption  of  the  silver  standard  would  give  us  a  tre- 
mendous advantage  over  foreign  nations  using  gold  as  money. 
The  free  coinage  of  silver  would  not  only  have  the  effect  of  a 
protective  tariff,  lessening  our  imports  of  foreign  goods,  but 
would  also  stimulate  our  exports  by  giving  our  producers  an 
advantage  like  that  which  the  producers  of  India  had  enjoyed. 

Various  other  arguments  were  employed  by  the  partisans  of 
silver,  but  they  were  not  important,  although  they  made  some 

1  The  rupee  contains  165  grains  of  pure  silver  and  in  1873  was  equivalent  to 
44  cents.  After  1873  its  g°ld  value  declined,  until  in  1893  'lt  was  worth  only 
26  cents  in  gold.  India's  experience  with  the  rupee  is  described  in  Chapter  XIV. 


THE  SILVER  QUESTION  247 

impression  upon  voters.  It  was  urged,  for  example,  that  silver 
was  the  poor  man's  money  and  gold  the  rich  man's,  and  that 
free  coinage  of  silver  would  put  more  money  into  the  pockets 
of  the  people.  A  good  deal  of  emphasis  was  also  laid  upon  the 
possibility  of  cornering  the  world's  supply  of  gold.  It  was 
pointed  out  that  all  the  gold  in  the  world  could  be  got  into  a 
room  of  small  dimensions,  and  that  a  number  of  wealthy  men, 
by  getting  control  of  the  supply  of  gold,  could  force  the  poor 
people  to  sell  their  products  at  any  prices  the  rich  might  name. 

REVIEW  OF  THE  ARGUMENT 

164.  Some  of  the  above  arguments  are  hardly  worth  consider- 
ing. Neither  metal  can  be  called  the  poor  man's  money.  Since 
he  has  but  little  purchasing  power  he  is  able  to  use  but  little 
money  of  any  kind,  and  he  needs  pieces  of  small  denominations. 
These  in  the  form  of  credit  money  can  be  furnished  him  under 
the  gold  standard  quite  as  well  as  under  the  silver  standard. 

As  for  the  possibility  of  cornering  money,  the  difficulty  is 
commensurate  not  with  its  quantity  but  with  its  value.  If 
the  United  States  were  using  silver  as  money,  even  though 
its  value  with  respect  to  gold  were  as  16  to  I,  the  total 
value  of  the  money  supply  in  the  country  would  be  no  greater 
than  it  is  at  present,  although  its  bulk  would  be  sixteen  times 
greater.  A  syndicate  of  rich  men,  if  there  were  any  motive  for 
so  doing,  could  corner  the  world's  stock  of  silver  as  easily  as 
they  could  the  world's  stock  of  gold.  Furthermore,  if  the  world 
were  using  gold  and  silver  as  money  on  a  basis  of  international 
bimetallism,  the  total  value  of  the  world's  money  supply  would 
be  no  greater  than  it  is  at  present,1  and  the  task  of  getting 
possession  of  any  large  part  of  it  would  be  no  greater  than  it  is 
at  present. 

We  need  not  give  much  space  to  the  peculiar  theory  of 
money  advanced  by  the  champions  of  silver.  The  idea  that  the 
demand  for  money  is  infinite,  comparing  with  the  demand  for 

1  It  was  shown  in  Chapter  II  that  the  supply  of  money  value  does  not  depend 
on  the  quantity  of  money,  i.e.  the  supply  of  money  units. 


248  MONEY  AND   CURRENCY 

other  goods  as  the  hand  of  Providence  does  with  the  hand  of 
man,  — a  comparison  made  by  Mr.  Harvey  in  his  Coin  s  Finan- 
cial School,  —  we  have  already  considered  in  Chapter  IV,  where 
it  was  shown  that  this  demand  is  as  limited  and  definite  as  the 
demand  for  any  tool  which  men  use.  The  strength  of  the  money 
demand  which  could  have  been  brought  to  bear  upon  silver  if 
the  United  States  mints  had  been  opened  to  it  in  1896  can  be 
approximately  estimated.  At  that  time  the  total  circulation  or 
supply  of  currency  in  the  United  States,  of  which  only  about 
one  third  was  gold,  amounted  to  $1,500,000,000.  Five  hundred 
million  silver  dollars  might  have  been  coined  and  substituted 
for  the  gold  without  causing  any  inflation  of  the  currency  and 
without  changing  the  level  of  prices,  if  we  assume  that  general 
confidence  in  the  standard  would  not  have  been  disturbed.  But 
if  more  silver  had  been  added,  the  supply  of  currency  would 
have  been  increased  and  prices  would  have  risen  above  the 
level  of  gold  prices. 

The  contention  that  the  free  coinage  of  silver  was  suspended 
as  a  result  of  a  conspiracy  is  absurd.  The  practical  financiers 
of  the  world  have  only  recently  begun  to  show  any  apprecia- 
tion of  the  influence  exerted  on  the  value  of  the  precious 
metals  by  their  use  as  money. 

165.  When  advocates  of  silver  criticised  the  gold  standard 
on  the  score  of  falling  prices,  they  called  attention  to  a  defect 
that  is  common  to  all  kinds  of  metal  money.  As  we  have  seen, 
the  values  of  gold  and  silver  are  never  stationary  but  are 
always  either  rising  or  falling  through  long  cycles  of  years. 
The  silver  man  assumed  that  gold  was  destined  always  to 
increase  in  value,  and  that  prices,  therefore,  were  bound  to 
continue  downward. 

Yet  even  while  he  was  making  this  argument  forces  were  at 
work  to  bring  about  a  change  in  the  value  of  gold  and  cause 
prices  to  rise.  The  increase  in  the  value  of  gold  after  1873  was 
due  to  extraordinary  circumstances,  the  demand  for  it  having 
been  so  greatly  increased  by  its  adoption  as  the  standard  of  prices 
in  most  of  the  civilized  countries  of  the  world.  That  gold  will 
ever  again  be  subjected  to  such  a  strain  is  not  possible. 


THE  SILVER  QUESTION 


249 


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250  MONEY  AND   CURRENCY 

VALUE  CHANGES  OF  GOLD  AND  SILVER 

1 66.  Chart  II,  on  page  249,  shows  the  divergent  paths  trav- 
eled by  gold  and  silver  after  1870.  The  heavy  black  line  shows 
the  value  of  gold  as  computed  from  Sauerbeck's  index  number. 
The  dotted  line  shows  the  value  of  silver,  calculated  by  com- 
parison of  its  gold  price  with  changes  in  the  value  of  gold.  The 
chart  is  derived  from  the  last  two  columns  of  the  table  printed 
on  page  251. 

Column  I  gives  the  Sauerbeck  index  number  from  1870 
to  1903,  that  is,  the  average  prices  of  forty-five  commodities, 
the  base  line  of  100  being  the  average  prices  for  the  period 
from  1867  to  1877.  Column  II  shows  changes  in  the  gold 
price  of  silver,  the  base  line  of  100  being  60.84  pence,  which 
was  the  average  London  price  of  an  ounce  of  silver  during  the 
period  from  1867  to  1877.  The  numbers  in  column  III,  show- 
ing changes  in  the  value  of  gold,  are  the  reciprocals  of  those  in 
column  I.  The  numbers  in  column  IV,  showing  changes  in  the 
value  of  silver,  are  derived  from  the  data  supplied  by  columns  I 
and  II.  For  example,  in  1885  the  average  gold  price  of  the 
forty-five  commodities  was  72,  and  the  gold  price  of  silver  was 
79.9 ;  hence  the  value  of  silver  with  respect  to  the  forty-five 
commodities,  as  compared  with  that  prevailing  during  the 
period  from  1867  to  1877,  had  risen  m  proportion  as  79.9 
exceeds  72,  or  1 1  per  cent.1 

The  decline  in  the  values  of  both  metals  for  three  years  after 
1870  represents  the  general  rise  of  prices  before  the  panic  of 
1873.  During  the  years  1874  and  1875  both  rise  sharply,  but 
silver  parts  company  with  gold,  increasing  less  in  value.  Gold 
continues  to  rise  after  1875  until  1879,  when  the  revival  of 
industry  led  to  an  expansion  of  credit  and  a  fall  in  the  value  of 
gold,  its  efficiency  as  money  being  increased.  After  1880  the 
value  of  gold  rose  quite  steadily,  from  1 13  in  1880  to  147  in  1887, 
but  declined  during  the  next  two  years  to  139.  There  was  little 
change  during  1 889, 1 890,  and  1 89 1 ,  but  after  that  it  began  a  rapid 

1  I  am  indebted  for  the  suggestion  of  this  table  and  chart  to  Helm's  Joint 
Standard,  p.  84. 


THE   SILVER   QUESTION 


251 


VALUE  CHANGES  OF  GOLD  AND  SILVER 


I 

II 

III 

IV 

Sauerbeck  Index 

Gold  Value  of 

No.  (Average 
Gold  Price  of 

Silver  in  London 
(60.84  pence 

Value  of  Gold 

Value  of  Silver 

45  Commodities) 

Assumed  as  100) 

1867-77 

100 

IOO.O 

IOO.O 

IOO.O 

1870 

96 

99.6 

104.0 

103.7 

1871 

IOO 

997 

IOO.O 

997 

1872 

109 

99.2 

91.7 

91.0 

1873 

III 

974 

90.0 

88.7 

1874 

IO2 

95.8 

98.0 

93-9 

1875 

96 

93-3 

104.0 

97.2 

1876 

95 

86.7 

105.2 

9i-3 

1877 

94 

90.2 

106.3 

96.0 

1878 

87 

86.4 

1  1  5.C 

99-3 

1879 

83 

84.2 

120.5 

104.4 

1880 

88 

85-9 

113.6 

97.6 

1881 

85 

85.0 

II7.6 

IOO.O 

1882 

84 

84.9 

II9.2 

161.2 

1883 

82 

83.1 

I22.O 

101.3 

1884 

76 

83-3 

131-5 

101.6 

1885 

72 

79-9 

139.0 

III.O 

1886 

69 

74-6 

145.0 

108.0 

1887 

68 

73-3 

147.0 

107.7 

1888 

70 

70.4 

142.8 

100.6 

1889 

72 

70.2 

138.8 

98-9 

1890 

72 

78.4 

138.8 

108.9 

1891 

72 

74.1 

138.8 

102.9 

1892 

68 

65.4 

147.0 

96.0 

1893 

68 

58.3 

147.0 

857 

1894 

63 

47.0 

I58-7 

74-6 

1895 

62 

49.0 

161.0 

79.0 

1896 

61 

50.6 

163.9 

83.0 

1897 

62 

45-3 

161.0 

73-o 

1898 

64 

44.2 

156.2 

69.0 

1899 

68 

45-° 

147.0 

66.0 

1900 

75 

46.5 

*33-3 

62.0 

1901 

70 

44-7 

142.8 

64.0 

1902 

69 

39-6 

145.0 

57-0 

1903 

69 

40.7 

145.0 

59-o 

252  MONEY  AND   CURRENCY 

ascent,  averaging  147  in  1892  and  1893,  158  in  1894,  161  in 
1895,  and  164  in  1896.  Since  then  the  trend  has  been  down- 
ward, the  average  being  161  in  1897,  156  in  1898,  147  in  1899, 
and  133  in  1900.  Thus  gold  rose  in  value  between  1873  and 
1893  from  90  to  147,  an  increase  of  63  per  cent ;  and  between 
1873  and  1896,  the  year  in  which  its  rise  of  value  was  checked, 
it  rose  from  90  to  164,  an  increase  of  82  per  cent. 

167.  With  respect  to  silver  the  chart  brings  out  three  facts 
of  interest,    (i)  The  value  of  silver  did  not  decline  after  1873, 
as  is  commonly  supposed,  but  for  twenty  years  was  above  the 
level  of  1873.    This  means,  assuming  the  Sauerbeck  index  num- 
ber to  represent  fairly  the  course  of  commodity  prices,  that  the 
average  purchasing  power  of  an  ounce  of  silver  between  1873 
and  1893  was  greater  than  in  1873.    We  should  expect,  there- 
fore, if  we  could  obtain  a  correct  index  number  of  prices  in 
silver-standard  countries  during  that  period,  to  find  that  prices 
did  not  rise  before  1893  but  rather  tended  downward.    (2)  The 
chart  shows  that  the  value  of  silver  in  1892  was  very  nearly 
what  it  was  in  1873;  and  (3)  that  the  suspension  of  free  coin- 
age in  India  and  the  repeal  of  the  purchase  clause  of  the  Sher- 
man Act  in  the  United  States,  both  happening  in  1893,  were 
followed  by  a  rapid  and  great  decline  in  the  value  of  the  metal. 

As  regards  the  relative  stability  of  the  two  metals,  the  chart, 
superficially  viewed,  indicates  that  silver  is  the  more  stable,  for 
prior  to  1893  it  departed  from  the  base  line  less  than  gold. 
But  we  can  draw  no  conclusion  in  favor  of  silver,  for  we  cannot 
ignore  the  fact  that  special  causes  were  operating  upon  the 
values  of  both  metals,  one  tending  to  lift  gold,  the  other  tending 
to  depress  silver.  If  bimetallism  had  not  been  abandoned  after 
1870,  and  if  Germany  had  continued  the  free  coinage  of  silver, 
it  is  probable,  but  not  certain,  that  silver  would  have  risen  in 
value  at  an  equal  pace  with  gold,  and  that  the  rise  of  both 
metals  would  have  been  considerably  less  than  the  advance 
made  by  gold  under  the  influence  of  the  combined  money 
demand  of  Europe  and  the  United  States. 

1 68.  The  fact  that  the  gold  price  of  silver  after  1873  was 
subject  to  monthly  fluctuations  cannot  be  regarded  as  evidence 


THE  SILVER  QUESTION  253 

that  silver  lacks  stability  of  value  over  short  periods  ;  it  proves 
merely  that  the  demand  for  it  in  Liverpool  and  New  York 
was  variable,  but  does  not  prove  that  the  price  level  in  silver- 
standard  countries  was  quickly  shifting  from  month  to  month. 
The  adjustment  of  prices  to  the  value  of  the  standard,  as  we 
have  seen,  is  a  slow  process.  An  index  number  of  Mexican 
prices  would  doubtless  show  that  between  1873  and  1893  the 
price  level  in  Mexico  varied  from  month  to  month  no  more  than 
the  price  level  in  the  United  States.  An  analogous  case  is  fur- 
nished by  our  experience  with  the  greenback  between  1861  and 
1879 ;  changes  in  the  price  level  during  this  period  by  no  means 
corresponded  with  changes  in  the  gold  value  of  the  greenback. 
We  shall  consider  this  point  more  fully  in  the  chapter  on  Fiat 
Money. 

169.  We  need  not  consider  in  much  detail  the  silver  argu- 
ment which  was  enforced  by  an  analysis  of  the  public  debt. 
The  silver  partisan  was  quite  right  in  his  statement  that  the 
burden  of  our  national  debt  had  been  increased  by  the  fall  of 
prices,  but  he  exaggerated  the  increase.  He  failed  to  mention 
that  the  productive  capacity  of  the  people  during  the  two 
decades  following  the  Civil  War  had  increased  at  a  marvelous 
pace,  that  several  thousand  miles  of  new  railroads  in  the  west- 
ern states  had  lowered  the  cost  of  producing  wheat,  and  that 
great  improvements  in  agricultural  machinery  had  practically 
doubled  the  productive  capacity  of  the  average  farmer.  A 
bushel  of  wheat  did  not  represent  as  much  labor  in  1896  as  in 
1873.  Throughout  the  entire  domain  of  industry  great  cheap- 
ening forces  had  been  at  work,  and  debtors  were  able  without 
any  increasing  effort  to  give  increasing  quantities  of  goods  to 
their  creditors  in  the  payment  of  each  dollar  of  debt. 

Nevertheless  there  was  some  truth  in  the  position  taken  by 
the  bimetallist.  The  fall  of  prices  had  exerted  a  depressing 
influence  upon  industry  and  had  added  to  the  burdens  of  long- 
time debtors  a  weight  not  counterbalanced  by  their  increased 
power  of  production.  But  for  the  rapid  increase  in  the  value 
of  gold  in  the  seventies  and  eighties  it  is  quite  possible  that 
the  railroads  of  the  country  would  have  found  their  mortgage 


254  MONEY  AND   CURRENCY 

indebtedness  a  lighter  load,  and  that  some  of  the  numerous 
foreclosures  and  receiverships  would  have  been  prevented.  It 
is  reasonable  to  believe  also  that  combinations  of  capital  into 
"trusts"  would  have  been  less  notable  in  the  eighties  had  not 
the  markets  for  goods  been  under  an  influence  which  business 
men  failed  to  comprehend  and  wrongly  attributed  to  over- 
production and  excessive  competition. 

FALLACIOUS  ARGUMENTS  FOR  GOLD 

170.  The  defenders  of  the  gold  standard  argued  that  the  fall 
of  prices  did  not  injure  the  farmer  or  any  one  else,  because  peo- 
ple, although  forced  to  sell  their  products  at  lower  prices,  were 
nevertheless  able  to  buy  correspondingly  more  with  every 
dollar  they  received.  This  argument  is  not  sound,  for  it 
ignores  the  fact  that  a  fall  of  prices  is  never  uniform.  This 
aspect  of  the  subject  has  been  covered  in  Chapters  VI  and  VIII 
and  need  not  be  reconsidered  here. 

It  was  generally  assumed  by  the  partisans  of  gold  that  the 
free  coinage  of  silver  would  yield  a  fifty-cent  dollar,  for  the 
bullion  in  the  silver  dollar  was  at  that  time  worth  only  50  cents, 
In  this  assumption  they  were  mistaken.  The  free  coinage 
of  silver  would  have  increased  the  demand  for  silver  and  would 
have  caused  its  value  to  rise.  There  would  have  been  a  less- 
ened demand  for  gold,  so  that  the  value  of  gold  would  have 
tended  downward.  The  United  States  would  have  taken  from 
the  markets  of  the  world  several  hundred  million  dollars'  worth 
of  silver  and  would  have  thrown  upon  those  markets  some  five 
hundred  million  dollars'  worth  of  gold.  This  disuse  of  gold  and 
increased  use  of  silver  must  have  caused  a  change  in  the  value 
relation  between  the  two  metals.  As  to  how  great  that  change 
would  have  been  we  can  only  speculate. 

The  fallacy  in  the  position  taken  by  the  defender  of  the  gold 
standard  was  shown  by  an  argument  which  he  advanced  almost 
in  the  same  breath  with  the  other.  He  held  that  this  country 
would  be  "  deluged  by  a  flood  "  of  silver  from  all  countries  of 
the  world.  It  is  quite  probable  that  large  quantities  of  silver 


THE   SILVER  QUESTION  255 

would  have  come  to  the  United  States  had  our  mints  been 
opened  to  it,  but  it  certainly  would  not  have  come  here  unless 
drawn  by  some  rise  in  its  value.  If  our  silver  dollar  were  to 
remain  a  fifty-cent  dollar,  silver  being  no  more  valuable  under 
free  coinage  than  before,  there  would  be  no  reason  why  more 
silver  should  come  to  the  United  States. 

171.  The  partisan  of  silver  had  a  ready  reply  to  the  objec- 
tion that  his  plan  would  deluge  the  United  States  with  silver. 
"Where,"  he  asked,  "will  this  silver  come  from  ?  Mexico  has 
none  to  spare,  nor  India,  nor  China.  France  and  Germany 
have  a  lot  of  silver,  but  all  of  it  is  coined  at  the  ratio  of  15.5 
to  i,  and  that  silver  could  not  be  sent  here  to  be  coined  at 
1 6  to  i  without  loss.  How  would  it  be  possible,  then,  to  increase 
our  money  supply  at  the  rate  which  the  gold  men  predict  ? " 
This  reply  was  plausible  but  fallacious.  It  is  true  that  Mexico, 
India,  and  China  needed  all  the  silver  they  had  and  were  using 
it  all  as  money ;  but  if  the  free  coinage  of  silver  in  the  United 
States  were  going  to  double  its  value,  as  was  claimed,  then 
Mexico  and  other  countries  on  the  silver  basis  would  no  longer 
need  all  their  silver  for  use  as  money,  for  the  level  of  prices 
would  be  lowered  50  per  cent  and  only  one  half  as  much 
money  would  be  needed  for  the  transaction  of  their  business. 
These  countries,  therefore,  if  the  silver  man's  own  prediction 
had  been  realized,  could  have  exported  half  their  silver  to  this 
country. 

As  for  the  silver  in  use  by  France,  Germany,  and  Russia,  it 
is  all  credit  money,  and  these  governments,  like  the  United 
States,  have  more  of  it  than  they  are  able  to  keep  in  circula- 
tion. The  value  of  a  credit  instrument  does  not  depend  upon 
the  material  upon  which  the  promise  to  pay  is  stamped  but 
upon  the  confidence  which  is  felt  in  the  government  or  person 
that  makes  the  promise.  The  finance  ministers  of  Germany, 
France,  and  Russia  are  well  aware  that  silver  is  an  expensive 
material  out  of  which  to  make  credit  money,  and  would  doubt- 
less be  glad  to  sell  their  silver  coins  as  bullion  if  something 
approximating  the  old  price  could  be  obtained.  They  could 
then  substitute  gold  or  bank  notes  for  them. 


256  MONEY  AND   CURRENCY 

172.  The  contention  that  the  free  coinage  of  silver  would 
increase  the  foreign  trade  of  the  United  States,  stimulating  our 
exports  especially,  was  based  on  the  assumption  that  prices 
would  continue  to  rise  after  the  free  coinage  of  silver  had  been 
adopted.  Although  the  first  effect  of  this  free  coinage  might 
possibly  have  been  a  rise  of  prices,  it  is  impossible  to  say  with 
certainty  what  would  have  happened.  It  is  quite  probable  that 
panic  and  monetary  chaos  would  have  been  the  first  result, 
no  man  knowing  how  much  money  he  was  worth  or  what  price 
he  should  ask  for  what  he  had  to  sell.  But  if  we  assume  that 
the  c.ountry  did  finally  pass  from  the  gold  basis  to  a  silver  basis, 
or  to  a  joint  basis  of  gold  and  silver,  a  sharp  rise  of  prices  must 
have  occurred.  The  value  of  silver  would  have  risen  until  the 
monetary  demand  of  the  United  States  for  that  metal  had 
been  satisfied.1  There  would,  however,  be  no  reason  for  believ- 
ing that  prices  in  this  country  would  continue  to  rise  after  the 
new  level  had  once  been  attained.  On  the  contrary,  the  increased 
demand  for  silver  for  monetary  use  in  the  United  States  might 
have  given  its  value  a  constant  upward  tendency,  so  that 
prices  in  this  country,  after  the  change,  might  have  tended 
downward.  The  free  coinage  of  silver,  therefore,  was  quite  as 
likely  to  continue  our  fall  of  prices  as  to  check  it,  only  the  fall 
would  have  started  from  a  higher  level  than  that  prevailing 
in  1896. 

The  free  coinage  of  silver  in  this  country  would  have  been 
almost  certain  to  cause  a  rise  of  prices  in  all  the  countries 
of  Europe,  for  the  lessened  demand  for  gold  in  this  country, 
taken  together  with  the  increased  supply  of  that  metal  in 
Europe,  would  have  tended  to  reduce  its  value.  So  England, 
the  country  most  hated  by  the  silver  party,  would  have  received 
greater  benefit  from  the  free  coinage  of  silver  here  than  the 
United  States  itself,  for  prices  in  England  would  have  shown  a 
marked  upward  tendency,  whereas  prices  in  the  United  States, 

1  This  rise  in  the  value  of  silver  would  have  produced  a  period  of  falling  prices 
in  all  countries  already  upon  the  silver  basis.  General  bankruptcy  and  ruin  would 
quite  possibly  have  been  brought  about  in  Mexico  and  Central  and  South -America 
by  a  rapid  fall  in  the  prices  of  all  goods. 


THE  SILVER  QUESTION  257 

after  the  chaos  of  the  change  of   standards  was  over,  would 
have  been  more  likely  to  tend  downward  than  upward. 

173.  The  argument  which  the  silver  man  addressed  to  the 
laboring  classes  was  not  altogether  unsound.    It  cannot  be  con- 
tended that  the  panic  of  1893  was  caused  by  the  appreciation 
of  gold.    Panics  come  during  periods  of  rising  prices  as  well  as 
during  periods  of  falling  prices,  and  their  causes  are  complex, 
most  important  among  them  being  the  undue  expansion  of  credit 
and  unwise  use  of  capital  in  the  production  of  goods.    Nor  could 
the  gold  standard  properly  be  held  responsible  for  the  existence 
of  the  large  army  of  unemployed  in  the  years  following  the 
panic,  for  all  panics  are  followed  by  several  years  of  industrial 
stagnation.    Nevertheless,  as  we  saw  in  the  chapter  on  The 
Importance   of   Price,   an  appreciating   standard  does  tend  to 
discourage  the  entrepreneur  and  to  lessen  the  demand  for  both 
labor  and  capital.    If  the  advocate  of  silver  could  have  guaran- 
teed to  the  workingman  a  period  of  rising  prices  as  a  result  of 
the  free  coinage  of  silver,  his  assault  upon  the  gold  standard 
would  have  been  justified.    But,  as  we  have  seen,  he  offered  only 
a  change  to  silver  monometallism,  and  there  was  no  more  cer- 
tainty of    rising  prices  under   that  standard   than   there  had 
been  under  gold  monometallism.   There  would  indeed  have  been 
at  first  a  sharp  rise  of  prices,  but  this  would  have  hurt  the 
laboring  man  instead  of  helping  him,  for  the  rate  of  wages  would 
have  risen  much  more  slowly  than  the  prices  of  goods.    The 
free  coinage  of  silver,  therefore,  meant  for  the  workingman  a 
cheapening  of  the  dollar  in  which  his  wages  were  paid  and  no 
immediate  advance  in  the  rate  of  wages. 

SILVER  AND  WHEAT 

174.  As  for  the  argument  based  on  India's  apparent  com- 
mand of  the  wheat  markets  of  the  world  after  1873,  that  also 
contained  several  grains  of  truth.    If  two  competing  countries 
are  using  different  monetary  standards,  say  silver  and  gold,  a 
change  in  the  value  relation  between  the  two  metals  will  give  a 
temporary  stimulus  to  the  exports  of  that  nation  whose  money 


258  MONEY  AND   CURRENCY 

metal  is  falling  in  value  with  respect  to  the  other.  This  stimu- 
lus is  due  to  the  maladjustment  of  prices  that  always  accom- 
panies a  change  in  the  value  of  a  money  metal.  Whenever  the 
value  of  silver  falls  in  Europe  or  the  United  States  because  of 
an  increasing  supply  or  diminished  demand,  the  decline  is  indi- 
cated by  a  fall  of  the  gold  price  of  silver  before  the  general 
price  level  in  silver-standard  countries  has  been  much  affected. 
Before  1893,  for  example,  a  decline  in  the  price  of  silver  in 
Europe  could  not  affect  prices  in  India  until  additional  silver 
had  been  added  to  India's  money  supply  and  put  into  circula- 
tion among  the  people.  Consequently,  when  the  gold  price  of 
silver  fell  because  of  a  fall  in  the  value  of  that  metal,  the 
producers  of  India  were  under  no  inducement  on  that  account 
to  charge  higher  prices  for  their  goods,  for  their  money  costs  of 
production  had  not  increased.  An  ounce  of  silver  meant  as 
much  to  them  as  it  had  meant  before  the  decline  of  the  London 
or  New  York  quotation  for  silver ;  but  since  it  now  took  less 
gold  to  buy  an  ounce  of  silver,  it  was  possible  for  Europeans 
to  buy  a  given  quantity  of  India's  products  with  less  gold  than 
formerly.  In  consequence  American  and  European  producers 
who  were  competing  with  Indian  producers  were  obliged  to 
lower  their  prices,  although  the  only  cause  therefor  seemed  to 
be  a  change  in  the  relation  between  gold  and  silver. 

Such  a  condition  would  of  course  be  temporary  unless  the 
fall  in  the  value  of  silver  were  continuous.  India  would  increase 
her  exports  until  a  balance  had  been  created  requiring  an  impor- 
tation of  silver  sufficient  to  raise  her  price  level  to  parity  with 
the  value  of  silver  in  Europe  and  the  United  States.  Thus  when 
the  value  of  silver  was  falling  India's  exports  of  goods  were 
always  a  little  larger  than  they  otherwise  would  have  been,  the 
excess  representing  the  value  which  India  gave  to  the  world 
in  payment  for  the  additional  silver  required  in  her  circulation. 

When  the  gold  price  of  silver  fell  because  of  a  rise  in  the 
value  of  gold,  as  most  commonly  happened  between  1873  and 
1893,  the  effect  upon  India's  export  trade  was  more  apparent 
than  real  or  permanent,  and  was  due  to  the  maladjustment  of 
prices  in  gold-using  countries.  When  the  gold  price  of  silver 


THE  SILVER  QUESTION  259 

changes,  exporters  and  importers  are  usually  unaware  of  the 
cause  and  do  not  seek  to  discover  it ;  it  is  commonly  assumed 
in  gold-using  countries  that  the  value  of  silver  has  fallen,  and 
in  silver  countries  that  the  value  of  gold  has  risen.  So  when- 
ever the  gold  price  of  silver  fell  after  1873,  whatever  the  cause, 
the  first  effect  was  always  the  same,  namely,  importers  in  gold 
countries  were  able  to  get  goods  from  India  by  the  expenditure 
of  less  gold  than  before  the  fall,  and  consequently  American 
and  European  producers  in  competition  with  India  were  obliged 
to  lower  their  prices.  But  when  the  change  was  due  to  a  rise 
in  the  value  of  gold,  the  value  of  silver  not  declining,  there  was 
no  reason  why  India  should  import  an  unusual  amount  of  silver, 
for  India  did  not  then  need  any  addition  to  her  money  supply. 
Nevertheless  the  exporters  of  India  had  a  temporary  advan- 
tage in  the  world's  markets.  Without  any  sacrifice  they  were 
able  to  cut  under  the  gold  price  which  had  prevailed  for  the 
same  goods.  But  their  advantage  could  be  only  temporary, 
for  prices  in  the  gold  countries,  since  gold  was  increasing  in 
value,  soon  fell  to  a  level  which  placed  the  European  and  the 
American  exporter  on  a  par  with  the  Indian  exporter.  Any 
long  delay  in  the  adjustment  of  prices  in  gold  countries  would 
continue  India's  advantage  and  give  her  an  unusual  balance  of 
trade,  but  the  resultant  importation  of  silver  would  lift  her 
price  level  and  so  deprive  her  exporters  of  their  advantage  over 
exporters  in  gold  countries.  In  fact  such  an  importation  of 
silver,  after  prices  in  gold  countries  had  become  adjusted  to  the 
new  value  of  gold,  would  put  Indian  exporters  at  a  disadvantage 
for  a  time  and  perhaps  cause  an  exportation  of  silver. 

175.  So  when  two  countries  are  using  different  metals  as 
money  a  fall  in  the  value  of  one  causes  the  country  using  it  to 
increase  its  exports  by  an  amount  sufficient  to  pay  for  the  addi- 
tional quantity  of  metal  needed  in  its  money  supply.  If  the 
value  of  one  rises,  the  exports  of  the  country  using  the  other 
metal  as  money  will  apparently  be  stimulated  but  will  not  in 
the  long  run  be  increased  in  quantity.  The  free  coinage  of 
silver  could  have  given  the  United  States  no  advantage  in  the 
markets  of  the  world  unless  silver  had  continued  to  depreciate, 


260  MONEY  AND   CURRENCY 

in  which  case  the  United  States  would  simply  have  increased 
its  exports  by  an  amount  sufficient  to  pay  for  the  additional 
silver  which  it  needed  as  money.  It  is  doubtful  if  such  an 
increase  of  exports  could  be  called  advantageous,  for  we  should 
have  been  giving  to  the  world  larger  and  larger  quantities  of 
wheat,  cotton,  etc.,  in  exchange  for  a  cheapening  metal.  There 
was  no  certainty,  however,  that  even  this  doubtful  advantage 
would  have  been  gained,  for  silver,  if  we  coined  it  freely,  would 
have  been  quite  as  likely  to  rise  in  value  as  to  fall. 

The  student  must  not  imagine  that  the  changes  in  price 
levels  which  lead  to  changes  in  the  exports  or  imports  of  various 
countries  are  ever  so  large  as  to  attract  general  attention.  He 
may  not  be  able  by  studying  the  statistics  of  prices  in  different 
countries  to  discover  any  noticeable  effect  of  changes  in  the 
value  relation  of  gold  and  silver,  for  a  fractional  variation  of 
price  is  sufficient  to  give  a  new  trend  to  international  trade 
movements.  Between  1873  and  1893,  when  the  gold  price  of 
silver  was  declining,  the  export  trade  of  India  did  not  always 
show  a  gain.  This  is  what  we  should  expect,  for  the  fall  in 
the  gold  price  of  silver  during  most  of  that  period  was  due  to 
an  increase  in  the  value  of  gold  rather  than  to  any  decline  in 
the  value  of  silver.  The  value  of  silver  did  not  begin  to  fall 
until  the  closing  of  India's  mints  in  1893,  and  after  that  date 
changes  in  the  value  of  silver  ceased  to  have  any  effect  upon 
the  prices  of  India  and  so  ceased  to  have  any  influence  upon 
India's  trade. 

176.  Since  1893  the  use  of  silver  as  money  has  steadily 
declined.  The  gold  standard  has  been  adopted  by  Russia,  Aus- 
tria, Japan,  India,  Peru,  Costa  Rica,  Ecuador,  and  Siam.  The 
"  silver  question  "  is  dead,  and  the  use  of  silver  as  standard 
money,  it  now  seems  probable,  will  soon  be  everywhere  discon- 
tinued. In  1905  Mexico  suspended  the  free  coinage  of  silver 
and  adopted  what  is  known  as  the  "  gold-exchange  standard." 
By  limitation  of  the  supply  of  currency  and  by  the  sale  of 
foreign  exchange  at  a  fixed  rate  it  is  proposed  to  keep  the 
Mexican  dollar,  or  peso,  at  par  with  50  cents  in  the  money  of  the 
United  States.  It  is  hoped  that  China  and  other  silver-standard 


THE  SILVER  QUESTION  26 1 

countries  may  be  persuaded  to  adopt  the  same  policy  so  that 
all  countries  may  have  a  common  par  of  exchange.  In  this 
movement  the  United  States  has  taken  prominent  part,  having 
sent  an  expert  commission  to  Mexico  and  China  to  urge  the 
advantage  of  keeping  silver  coins  at  a  fixed  value  relation  with 
gold.1 

The  Mexican  experiment  will  be  watched  with  much  interest 
by  students  of  the  money  question.  The  peso  contains  about 
377  grains  of  pure  silver,  and  at  the  price  of  that  metal  prevail- 
ing in  1905  (about  60  cents  per  ounce)  was  worth  about  47  cents 
in  gold.  In  order  to  maintain  it  at  par  with  50  cents  in  gold 
the  government  will  not  only  regulate  the  coinage  and  so  con- 
trol the  supply  but  will  also  sell  exchange  on  New  York  and 
London  at  the  rate  of  one  gold  dollar  for  two  pesos  plus  the 
cost  of  gold  shipments.  As  there  are  in  circulation  outside  of 
Mexico  large  quantities  of  Mexican  dollars  whose  value  for 
several  years  has  been  less  than  50  cents  in  gold,  their  impor- 
tation into  Mexico  at  a  profit  is  prevented  by  a  customs  duty. 
If  the  plan  is  successfully  carried  out,  Mexico  will  practically 
be  on  the  gold  basis,  prices  rising  and  falling  with  changes  in 
the  value  of  gold.  The  currency  will  consist  of  silver  coins  and 
of  bank  notes  redeemable  in  silver,  but  all  will  in  reality  be 
credit  money  indirectly  redeemable  in  gold.  The  reform  has 
the  advantage  of  not  requiring  any  change  in  the  customs  of 
the  people ;  they  will  continue  to  use  the  silver  coins  to  which 
they  are  accustomed,  but  these  will  no  longer  fluctuate  in  value 
with  respect  to  gold.  To  the  common  people  gold  will  appear 
to  have  suddenly  acquired  stability  of  value,  for  the  price  of 
gold  in  Mexico  will  not  change. 

Should  silver  rise  in  value  with  respect  to  gold  until  its  price 
in  the  United  States  is  above  64  cents  an  ounce,  the  bullion 

1  An  American  commission,  consisting  of  Professor  J.  W.  Jenks,  C.  A.  Conant, 
and  H.  H.  Hanna,  at  the  request  of  Mexico  and  China,  and  accompanied  by  a 
Mexican  commission,  visited  Europe  in  1903,  meeting  commissioners  from  Great 
Britain,  France,  Holland,  Germany,  and  Russia.  Professor  Jenks,  as  commis- 
sioner of  the  United  States,  also  visited  China.  The  reader  will  find  an  interest- 
ing discussion  of  this  subject  in  the  Report  of  the  Commission  on  International 
Exchange  (government  publication,  Washington,  1903). 


262  MONEY  AND  CURRENCY 

value  of  the  Mexican  peso  will  exceed  50  cents  in  gold,  and 
a  certain  quantity  of  pesos  will  in  consequence  be  melted  or  ex- 
ported. The  resultant  contraction  of  the  currency  will  raise  the 
value  of  the  peso  as  a  coin  to  a  par  with  its  value  as  bullion.1 

LITERATURE 

Several  hundred  books  and  pamphlets  for  and  against  the  free  coinage 
of  silver  were  published  in  the  United  States  during  the  political  contro- 
versy in  1895  and  1896.  Few  of  these  possess  any  value.  The  following 
are  typical  pro-silver  books :  W.  H.  HARVEY,  Coin's  Financial  School; 
WHARTON  BARKER,  Bimetallism.  The  arguments  most  used  by  the  oppo- 
nents of  silver  will  be  found  in  the  following:  HORACE  WHITE,  Coin's 
Financial  Fool;  J.  L.  LAUGHLIN,  Facts  about  Money. 

Historical  works:  F.  W.  TAUSSIG,  The  Silver  Situation  in  the  United 
States  (New  York,  1896);  G.  M.  COFFIN,  Silver  from  1849  to  1892; 
A.  B.  HEPBURN,  History  of  Coinage  and  Currency  hi  the  United  States; 
report  of  Director  of  the  Mint  for  1896. 

1  In  1906  the  price  of  silver  rose  above  64  cents  per  ounce  fine,  and  the  expor- 
tation of  silver  pesos  began.  As  the  law  permits  the  free  coinage  of  gold  pesos 
(one  gold  peso  equaling  the  Japanese  yen  of  750  milligrams  of  pure  gold,  or 
about  50  cents),  Mexico  is  being  rapidly  supplied  with  gold  coins  and  is  now 
(1907)  definitely  on  the  g6ld  basis.  An  export  tax  of  10  per  cent  has  checked 
the  exportation  of  silver  pesos.  The  Mexican  government  is  said  to  be  preparing 
to  substitute  a  lighter  coin  for  the  old  silver  peso. 


CHAPTER  XIII 

FIAT   MONEY:   ILLUSTRATED   BY  THE  GREENBACK 

177.  Supply  of  fiat  money  regulated  artificially.  178.  Erroneous  view  that 
money  must  derive  its  value  from  that  of  the  material  constituting  it.  179.  Fiat 
money  may  be  made  out  of  a  material  possessing  value  as  a  commodity.  180.  If 
Congress  should  suspend  the  free  coinage  of  gold,  the  gold  eagle  would  become 
fiat  money.  181.  Depreciated  credit  money  is  the  kind  of  fiat  money  with  which 
the  world  has  had  most  experience.  182.  Confidence  is  only  one  of  several  factors 
in  the  value  of  depreciated  credit  money.  183.  When  credit  money  has  depreci- 
ated and  become  the  fiat  standard  of  prices  its  value  is  not  the  result  of  any  con- 
scious comparison  with  the  old  standard.  184.  Fiat  money  has  real  value  and 
performs  all  the  functions  of  money.  185.  The  issue  of  depreciated  government 
notes  during  the  Civil  War.  186.  Four  facts  to  be  taken  into  account  in  a  study 
of  prices  during  the  greenback  period.  187.  Demand  for  the  greenback  as  money 
during  the  Civil  War.  188.  A  comparison  of  the  course  of  prices  with  changes  in 
the  money  supply  during  the  greenback  epoch.  189.  During  the  War  Period 
doubt  about  the  redemption  of  the  greenback  was  an  important  factor  in  its  value. 
190.  Between  1865  and  1875  tne  greenback  was  fiat  money,  possessing  no  credit- 
money  characteristics.  191.  During  the  resumption  period  the  greenback  gradu- 
ally lost  its  fiat  characteristics.  192.  The  course  of  prices  compared  with  changes 
in  the  total  circulation.  193.  Examination  of  the  view  that  the  value  of  the  green- 
back was  determined  by  its  gold  price.  194.  Greenback  prices  of  all  imported 
commodities  must  have  closely  followed  fluctuations  in  the  price  of  gold.  195.  The 
greenback  price  of  gold  embodied  expert  estimates  as  to  the  future  value  of  the 
greenback.  196.  The  gold  price  of  greenbacks  cannot  be  explained  on  the  ground 
that  it  was  the  product  of  an  investment  demand. 

177.  Fiat  money  is  money  the  supply  of  which  is  regulated 
artificially.  Its  value  is  determined  solely  by  the  demand  for 
and  supply  of  money,  and  is  independent  of  the  value  of  the 
commodity  or  material  out  of  which  it  is  made.  The  material 
for  fiat  money  may  be  a  comparatively  valueless  substance  like 
paper  or  a  valuable  metal  like  gold  or  silver.  Money  made  of 
paper  inscribed  "This  is  a  dollar"  or  "This  is  a  pound  ster- 
ling "  would  be  pure  fiat  money.  Fiat  money  may  perform  all 
the  services  of  money  ;  through  its  use  as  a  medium  of  exchange 
it  may  become  the  standard  of  prices  (or  value  so  called),  the 
basis  for  credit,  and  the  standard  of  deferred  payments. 

263 


264  MONEY  AND    CURRENCY 

No  country  has  ever  consciously  adopted  fiat  money.  All 
nations,  so  far  as  we  know,  have  employed  as  money  something 
having  value  apart  from  its  use  as  money,  —  something  possess- 
ing so-called  intrinsic *  value.  The  shells  which  we  assumed  in 
Chapter  I  to  have  been  the  first  money  used  by  primitive  man 
were  so  employed  because  of  the  value  they  possessed  as  orna- 
ments. Their  value  in  the  beginning  was  due  entirely  to  their 
utility  for  personal  adornment,  but  as  they  came  into  use  as 
money  they  gained  a  new  utility  and  became  subject  to  an  addi- 
tional demand,  and  their  value  tended  to  increase  as  a  result. 
They  were  commodity  money  so  long  as  their  use  as  money 
was  free  and  unrestricted. 

If  we  suppose  that  after  a  certain  people  had  become  habitu- 
ated to  the  use  of  shells  as  money  they  should  cease  to  care  for 
shells  as  ornaments,  having  found  a  more  beautiful  or  more  novel 
substitute,  the  shells  would  then  possess  value  only  because  of 
their  use  as  money.  They  would,  however,  still  be  commodity 
money  if  the  free  use  of  shells  as  money  were  permitted. 

But  suppose  that  the  tribe  using  these  shells,  finding  that 
the  supply  was  increasing  too  rapidly,  decided  to  put  a  caba- 
listic mark  upon  each  shell  in  their  stock  on  hand  and  to  refuse 
thereafter  to  accept  any  as  money  unless  so  marked.  If  this 
were  done,  a  distinction  would  at  once  arise  between  marked 
and  unmarked  shells.  The  marked  ones  would  be  wanted  on 
account  of  their  convenience  as  a  medium  of  exchange ;  the 
unmarked  would  be  wanted  by  nobody  and  would  have  no 
value.  The  marked  shells  would  be  pure  fiat  money.  Their 
value  would  no  longer  be  dependent  upon  the  abundance  of 
shells  in  general  or  upon  the  difficulty  of  finding  them,  but 
would  be  due  entirely  to  the  demand  for  money  among  that 
primitive  people,  and  would  vary  as  their  demand  for  money 
varied.  If  the  people,  fascinated  by  the  mysterious  purchasing 
power  of  these  marked  shells,  and  not  understanding  its  cause, 

1  An  incorrect  use  of  this  adjective.  Value,  being  dependent  on  human  wants, 
cannot  be  an  intrinsic  or  inherent  property  of  anything.  When  men  say  that  the 
gold  dollar  possesses  "  intrinsic  "  value  they  mean  that  it  has  a  commodity  value 
apart  from  its  use  as  money. 


FIAT   MONEY:    THE  GREENBACK  265 

should  increase  their  quantity  on  the  ground  that  thus  each 
man  would  have  more  shells  and  so  all  would  be  enriched,  such 
an  increase  in  the  number  of  marked  shells  would  have  an 
immediate  effect  upon  their  exchange  power.  If  these  people 
employed  credit  in  no  form  whatever,  the  purchasing  power  of 
the  shells  would  decline  in  proportion  as  their  quantity  grew ; 
if  the  number  of  shells  were  doubled,  each  would  buy  only 
half  as  much  as  before.  The  purchasing  power  of  the  total 
number  of  shells  could  not  be  made  greater  by  any  addition  to 
their  quantity,  for  the  value  of  each  shell  would  fall  in  proportion 
as  the  number  increased. 

178.  Some  writers  on  money  appear  to  doubt  the  possibility 
of  fiat  money,  insisting  that  money  always  derives  its  value 
from  that  of  the  commodity  or  material  constituting  it.  It  is 
asserted,  for  instance,  that  in  the  case  of  a  people  using  shells 
as  money,  if  they  possess  no  value  as  ornaments,  there  will  be 
no  reason  why  a  man  who  has  found  a  new  stock  of  shells 
should  begin  to  use  them  as  money,  since  by  so  doing  he  would 
lessen  the  purchasing  power  of  those  already  in  use.  It  is 
claimed  that  he  would  hold  the  shells  back  and  so  prevent  their 
having  any  effect  upon  the  prices  of  goods.1  This  objection 
assumes  that  men  understand  the  nature  of  money  and  that 
they  will,  therefore,  voluntarily  refrain  from  doing  anything 
which  will  lessen  its  value.  We  will  not  pause  to  discuss  this 
assumption,  for  it  makes  no  difference  in  the  argument.  Since 
the  shells,  according  to  the  hypothesis,  possess  no  value  except 
as  a  medium  of  exchange,  what  selfish  advantage  would  a  man 
find  in  holding  back  the  new  stock  which  he  has  found  ?  There 
is  only  one  way  that  he  can  make  them  serve  him,  and  that  is 
by  getting  rid  of  them  in  exchange  for  what  he  wants.  So  long 
as  he  keeps  them  in  his  possession  or  buries  them  in  a  cave 
for  fear  of  depressing  the  value  of  money,  they  are  of  no  more 
account  to  him  than  so  much  sawdust.  If  he  should  understand 
the  effect  that  his  shells  would  have  on  prices,  he  might  en- 
deavor to  exchange  them  so  adroitly  as  to  minimize  his  loss 

1  See  Annals  of  the  American  Academy,  March,  1897,  "The  Quantity  Theory 
of  Money,"  by  W.  A.  Scott. 


266  MONEY  AND   CURRENCY 

from  the  rise  of  prices,  but  that  he  would  get  rid  of  them 
is  certain.  That  is  exactly  what  men  do  with  money  at  the 
present  time  when  they  have  more  of  it  than  they  want. 

179.  We  assumed  in  the  preceding  illustration  that  the  shells 
had  lost  their  utility  as   ornaments  and  that  therefore  they 
would  be  valueless  but  for  their  use  as  money.    This  supposi- 
tion was  not  a  necessary  one.    Let  us  assume  that  the  shells 
retained  their  charm  as  ornaments  but  that  on  account  of  their 
increasing  abundance  it  was  found  desirable  to  limit  the  number 
that  could  be  used  as  a  medium  of  exchange.    The  shells  so 
marked  would  be  fiat  money,  and  their  value  would  rise  as  the 
demand  for   money  increased.    The   potential    utility  of   the 
marked  shells  as  ornaments  would  not  be  the  cause  of  their 
value  except  under  one  condition,  namely  :  if  their  value  as 
money  tended  to  fall  below  the  value  of  the  unmarked  shells, 
some  of  them  would  be  used  as  ornaments  and  thus  the  down- 
ward tendency  of  their  value  would  be  checked.    In  a  case  of 
this  sort  we  might  say  that  such  money  combined  in   some 
measure  the  properties  of  both  fiat  and  commodity  money,  for 
while  the  supply  could  be  diminished  automatically  it  could 
only  be  increased  artificially. 

1 80.  That  fiat  money  may  be  made  out  of  material  possess- 
ing value  may  be  shown  by  an  illustration  that  will  perhaps 
tax  the  reader's  imagination  less  than  our  hypothetical  shell 
money.    Let    us    suppose    that    the    world's    output    of    gold 
increases  so  rapidly  that  a  great  fall  in  the  value  of  gold  is 
imminent,  and  that  Congress,  to  prevent  a  formidable  rise  of 
prices,  repeals  the  law  permitting  its  free  coinage.    The  gold 
coins  of  the   United    States  would  immediately  become  fiat 
money,  for  no  matter  how  great  the  increase  in  the  world's 
stock  of  gold,  the  quantity  of  gold  coins  would  remain  unchanged, 
and  their  value  would  tend  to  rise  as  the  demand  for  money 
increased  on  account  of  increasing  business  and  population. 
The  relation  that  would  then  exist  between  gold  and  money  is 
shown  by  Diagram  VI  (page  267). 

Here  we  have  on  the  left  a  square  representing  258  grains  of 
standard  gold,  and  on  the  right  a  circle  representing  a  gold 


FIAT  MONEY:  THE  GREENBACK 


267 


eagle,  a  coin  containing  258  grains  of  standard  gold.  The  only 
connection  between  the  two  is  by  way  of  the  melting  pot,  and 
it  is  evident  that  no  coins  will  be  melted  unless  the  value  of 
uncoined  gold  tends  to  rise  above  that  of  coined  bullion.  The 
value  of  the  coin  depends  upon  the  demand  for  money  in  the 
United  States  ;  as  that  increases  the  value  of  the  coin  must 
rise,  for  the  supply,  we  have  assumed,  cannot  be  increased  by 
the  free  coinage  of  gold.  The  rise  in  the  value  of  the  coin 
would  not  affect  that  of  the  bullion,  for  the  latter  could  not  be 


WORLD  DEMAND  FOR  USE 
IN  ARTS  AND  AS  MONEY 


DEMAND  FOR  MONEY  IN 
UNITED  - STATES 


COLD  BULLION 

358  GRAINS 


MELTING  POT 


WORLDS  SUPPLY  OF  GOLD 


SUPPLY  OF  MONEY  IN 
UNITED  STATES 


DIAGRAM  VI 


converted  into  coin.  Money  of  this  kind,  even  though  made 
of  gold,  would  be  fiat  money,  for  its  supply  would  be  artificially 
regulated  and  its  value  would  be  independent  of  the  value  of 
gold.  If  for  any  reason  the  value  of  gold  should  rise  until  258 
grains  were  worth  $10,  this  money  would  then  be  only  semi- 
fiat,  for  any  further  advance  in  gold  would  result  in  the  melting 
down  of  coins,  so  that  coins  and  bullion  would  rise  in  value 
together. 

The  world  has  had  experience  with  gold  and  silver  fiat  money. 
Indeed,  during  the  Middle  Ages  the  coins  of  various  European 


268  MONEY  AND   CURRENCY 

countries  possessed  fiat  characteristics;  for  as  the  free  and 
unlimited  coinage  of  gold  and  silver  was  not  permitted,  the 
supply  of  money  was  not  automatically  regulated  by  the  abun- 
dance or  scarcity  of  the  precious  metals.1  An  interesting  illus- 
tration of  silver  fiat  money  was  furnished  by  India  between 
1893  and  1897,  an  account  of  which  is  given  in  Chapter  XIV. 

DEPRECIATED  CREDIT  MONEY 

1 8 1.  The  fiat  money  with  which  the  world  has  had  most  ex- 
perience has  been  irredeemable  and  depreciated  credit  money, 
either  bank  notes  or  government  notes.  Credit  money,  if 
redeemed  on  demand,  and  if  the  people  have  confidence  in  the 
issuing  bank  or  government,  enjoys  the  same  exchangeability 
as  money  itself,  in  lieu  of  which  it  serves  as  a  common  medium 
of  exchange.  But  if  it  is  irredeemable  and  is  issued  in  excess 
of  the  monetary  need,  credit  money  falls  in  value,  losing  some 
degree  of  its  acceptability  and  being  quoted  at  a  discount.2  In 
the  same. way  a  man's  promissory  note  or  the  mortgage  bond 
of  a  railroad  is  discredited  and  brought  below  par  by  any 
doubt  as  to  its  final  payment. 

In  this  respect  credit  money  and  other  forms  of  credit  are 
alike  ;  all  sink  to  a  discount  when  there  is  fear  that  the  promise 
on  their  face  will  not  be  kept.  But  after  depreciation  has 
begun,  the  forces  governing  the  value  of  credit  money,  if  it  is  a 
legal  tender,  are  quite  different  from  those  governing  the  value 
of  other  forms  of  depreciated  credit.  The  demand  for  mortgage 
bonds,  promissory  notes,  etc.,  comes  from  investors  who  are 
seeking  interest  on  their  capital.  There  is,  as  a  rule,  no  such 
demand  for  credit  money,  for  it  does  not  commonly  bear 
interest.  Credit  money  is  wanted  by  men  not  as  an  invest- 
ment but  as  a  medium  of  exchange.  The  value  of  a  bond  on 
which  interest  is  in  default  reflects  the  judgment  of  investors 
with  regard  to  the  prospects  of  ultimate  payment ;  the  value  of 

1  See  Pierson,  Economics,  p.  416. 

2  The  forces  preserving  credit  money  from  depreciation  are  considered  more 
fully  in  Chapter  XVI. 


FIAT    MONEY:    THE   GREENBACK  269 

depreciated  credit  money,  if  it  is  legal  tender  and  can  be  made 
to  serve  as  money,  is  born  of  the  general  demand  for  it  as  a 
medium  of  exchange  and  basis  of  credit. 

When  legal-tender  credit  money  is  depreciated  it  becomes 
the  common  medium  of  exchange  and  the  standard  of  prices. 
Since  it  is  worth  less  than  the  money  it  has  represented, 
debtors  evidently  profit  by  its  use.  Bankers,  who  are  the 
largest  single  class  of  debtors  in  any  country,  are  obliged  to 
accept  it  in  payment  of  loans  and  so  are  forced  to  pay  it  out  to 
depositors ;  hence  depreciated  credit  money  quickly  gets  into 
every  channel  of  the  circulation,  effectually  driving  out  the  old 
standard  and  becoming  itself  a  new  standard  of  prices.  All 
business  is  before  long  done  in  terms  of  the  depreciated  money. 
It  becomes  not  only  the  standard  of  prices  but  also  the  basis 
of  credit,  for  promissory  notes,  checks,  drafts,  etc.,  are  canceled 
by  its  payment.  As  a  result  it  becomes  the  object  of  the  coun- 
try's monetary  demand  and  acquires  a  value  of  its  own  quite 
independent  of  its  relation  to  the  old  standard.  It  becomes,  in 
short,  fiat  money,  its  value  being  due  to  the  monetary  service  it 
performs  rather  than  to  its  promissory  relation  to  the  old  money. 

182.  It  must  not  be  inferred  from  the  foregoing  analysis 
that  confidence  is  not  a  factor  in  the  value  of  depreciated  credit 
money.  A  little  reflection  will  show  that  the  element  of  con- 
fidence must  underlie  all  forms  of  fiat  money.  If  people  posi- 
tively distrust  the  issuing  government  or  bank,  if  there  is  no 
feeling  of  certainty  with  regard  to  the  amount  of  such  money 
already  issued  or  to  be  issued,  if  there  is  fear  of  national  bank- 
ruptcy or  dissolution,  men  will  withhold  goods  from  sale  or 
resort  to  barter  rather  than  accept  money  which  is  liable  to 
become  worthless  overnight.  Under  such  circumstances  depre- 
ciated credit  money  or  any  form  of  fiat  money  loses  all  its 
acceptability  and  ceases  to  be  money.  To  the  extent  that  there 
is  doubt  or  fear  about  the  future  value  of  fiat  money  its 
acceptability  is  lessened,  the  demand  for  it  to  serve  as  money 
is  reduced,  and  its  value  is  lowered. 

This  point  is  not  always  clearly  made  in  books  on  money. 
Because  the  initial  depreciation  of  credit  money  is  due  to  loss 


270  MONEY  AND   CURRENCY 

of  confidence,  further  fluctuations  in  its  value  are  commonly 
attributed  to  the  same  cause,  the  influence  of  the  monetary 
demand  being  ignored.  Some  writers  even  take  the  view  that 
the  value  of  depreciated  credit  money  hinges  altogether  on  its 
prospects  of  redemption,  varying  with  every  shift  of  popular 
confidence.  Increasing  issues,  according  to  this  view,  cause 
further  depreciation,  not  because  of  a  new  relation  between 
the  demand  for  and  supply  of  money  but  because  the  people 
have  less  faith  that  the  money  will  be  redeemed.  This  view  is 
inadequate,  for  it  takes  into  account  only  one  of  several  cir- 
cumstances which  affect  the  value  of  such  money. 

183.  Nor  is  it  true,  as  is  sometimes  held,  that  men  arrive  at 
the  value  of  depreciated  credit  money  by  consciously  compar- 
ing it  with  the  old  standard.  When  selling  goods  men  consider, 
as  a  rule,  only  two  things,  namely,  the  value  of  the  goods  and 
the  value  or  purchasing  power  of  the  money  offered.  Their 
estimate  of  the  money's  purchasing  power  is  not  a  product  of 
conscious  comparison  with  any  single  commodity ;  it  is  forced 
upon  them,  without  conscious  calculation  on  their  part,  by  the 
prevailing  prices  of  commodities  in  general.  These  show  what 
the  money  is  worth  in  goods,  and  that  is  all  men  want  to  know. 
If  there  is  no  doubt  as  to  the  immediate  future  of  the  depre- 
ciated credit  money,  the  credit  and  stability  of  the  issuing  gov- 
ernment or  bank  not  being  threatened,  men  soon  get  to  regard 
it  as  possessing  a  value  of  its  own,  and  unconsciously  attribute 
changes  of  prices  to  changes  in  the  values  of  things.  When 
this  condition  prevails  the  depreciated  credit  money  loses  its 
credit  characteristics  and  becomes  pure  fiat  money,  its  value 
depending  upon  its  supply  in  relation  to  the  monetary  demand. 

During  a  transition  from  a  metal  to  a  fiat  standard  of 
depreciated  credit  money  there  is  always  a  period  of  uncer- 
tainty, during  which  time  commodities  have  two  prices,  one  in 
metal  and  one  in  paper;  but  the  use  of  two  standards  of  prices 
is  so  inconvenient  that  this  period  is  usually  short.  Experience 
has  proved  that  people  soon  get  so  familiar  with  the  value  of 
the  fiat  money  that  they  base  all  their  calculations  upon  it,  the 
abandoned  metal  becoming  a  commodity  like  other  metals. 


FIAT   MONEY:    THE  GREENBACK  271 

184.  On  account  of  the  importance  of  this  subject  we  shall 
now  examine  in  considerable  detail  several  illustrative  examples 
of  fiat  money.  Before  entering  upon  this  task  it  would  be  well 
for  the  reader  to  review  the  points  thus  far  made  in  this  chap- 
ter and  get  as  clear  an  idea  as  possible  of  the  nature  of  fiat 
money.  He  must  notice  that  such  money  has  real  value  and 
that  it  serves  all  the  purposes  of  money.  Its  value  is  the  prod- 
uct solely  of  the  demand  for  money,  and  there  can  be  no  doubt 
about  the  reality  of  that  demand.  People  do  not  easily  grasp 
the  nature  of  fiat  money,  for  the  average  man's  ideas  about 
money  are  altogether  derived  from  the  use  of  gold  and  silver  as 
commodity  money,  and  here  money  and  the  metal  seem  to  be 
the  same  thing.  Fiat  money  will  not  be  a  puzzle  to  the  stu- 
dent if  he  clearly  understands  the  principles  governing  the  use 
of  gold  as  commodity  money.  As  we  have  seen,  even  under  a 
system  of  free  coinage  the  coin  and  the  bullion  are  not  abso- 
lutely identical  in  value ;  sometimes  the  bullion  is  the  more 
valuable,  and  then  coins  are  melted  down.1  In  all  fundamental 
respects  fiat  money  is  exactly  like  commodity  money  ;  the  only 
difference  between  the  two  is  in  the  regulation  of  the  sup- 
ply, the  one  being  automatic,  the  other  artificial.  The  value 
of  commodity  money  is  linked  to  the  value  of  its  material ; 
the  value  of  fiat  money  is  independent  of  the  value  of  its 
material. 

All  the  propositions  with  regard  to  the  nature  of  money  set 
forth  in  Chapter  II  apply  to  fiat  money  as  well  as  to  commodity 
money.  It  may  serve  as  a  standard  of  prices,  as  a  so-called 
measure  of  value,  as  a  store  of  value,  and  as  a  standard  of 
deferred  payments.  It  should  not  be  inferred  from  this  state- 
ment that  it  performs  all  these  functions  as  satisfactorily  as 
commodity  money,  —  that  is  a  subject  still  to  be  discussed, — 
but  that  it  is  real  money,  possessing  real  value  and  capable  of 
doing  all  the  work  of  money,  there  cannot  be  the  slightest 
doubt. 

1  The  greater  value  of  gold  as  bullion  than  as  coin  is  shown  either  by  rising 
prices  of  gold  ornaments,  etc.,  or  by  relatively  lower  prices  of  goods  and  securities 
in  foreign  countries. 


272  MONEY  AND   CURRENCY 

GREENBACKS  AS  FIAT  MONEY 

185.  In  the  United  States  the  greenback  era,  extending 
from  1862  to  1879,  furnishes  an  interesting  illustration  of  fiat 
money.  During  this  period  the  standard  money  of  the  United 
States  was  the  government's  promise  to  pay,  which  was  worth 
less  than  the  coin  in  which  it  was  nominally  redeemable.  In 
the  summer  of  1861,  the  money  of  the  country  then  being  gold, 
the  Secretary  of  the  Treasury  negotiated  with  the  banks  of 
New  York  City  a  loan  of  $150,000,000.  By  December  of  that 
year  Confederate  successes  on  the  field  of  battle  and  financial 
indecision  or  incapacity  at  Washington  had  so  weakened 
northern  credit  that  these  bonds  were  practically  unsalable. 
Depositors,  alarmed  by  the  outlook,  withdrew  so  much  gold 
from  the  New  York  banks  that  they  were  forced  to  suspend 
specie  payments  December  30,  1861.  The  stopping  of  specie 
payments  in  New  York  necessarily  led  to  general  suspension 
throughout  the  country,  except  in  California,  where  the  banks 
continued  on  a  specie  basis  throughout  the  war.  Bank  notes 
at  once  became  the  only  kind  of  cash  easily  obtainable. 

It  being  clear  that  the  government  could  no  longer  obtain 
gold  from  the  banks,  the  paper-money  advocates  in  Congress 
met  with  little  opposition.  On  February  25,  1862,  the  first 
so-called  legal-tender  act  was  passed  by  Congress.  It  provided 
for  the  issue  of  $150,000,000  United  States  notes  promising 
payment  in  coin  to  bearer,  no  date  for  payment  being  fixed. 
These  notes  were  issued  in  denominations  convenient  for  use 
as  currency.  In  the  following  June  another  issue  of  the  same 
amount  was  authorized,  and  on  January  13,  1863,  an  issue  of 
$100,000,000,  making  the  total  issue  $400,000,000.  In  June, 
1864,  Congress  authorized  an  additional  issue  of  $50,000,000, 
but  provided  that  this  issue  should  be  temporary,  so  that  at  the 
end  of  the  war  $400,000,000  of  these  notes  were  outstanding. 

These  United  States  notes,  payable  to  bearer  at  an  indeter- 
minate date,  and  popularly  called  greenbacks  because  of  their 
color,  were  legal  tender  for  all  payments,  but  from  the  first 
were  worth  less  than  their  face  value  in  gold  coin,  and  soon 


FIAT   MONEY:    THE   GREENBACK  273 

became  the  standard  money  of  the  North.  As  the  war  pro- 
gressed and  successive  issues  were  put  forth  they  rapidly 
depreciated  with  respect  to  gold.  Their  depreciation  was 
greatest  in  1864,  when  $100  in  greenbacks  was  worth  only 
$40  in  gold.  There  was  of  course  a  corresponding  rise  in  the 
prices'  of  goods.  All  business  within  the  country  was  done 
upon  a  greenback  basis,  gold  and  silver  having  disappeared 
from  circulation.  After  1865,  peace  being  restored,  the  green- 
back began  to  appreciate,  but  it  did  not  reach  parity  with  gold 
until  just  before  January  I,  1879,  when  in  accordance  with  a 
law  passed  in  January,  1875,  the  government  began  the  redemp- 
tion in  gold  of  all  greenbacks  presented. 

PRICES  AND  THE  SUPPLY  OF  MONEY 

1 86.  In  comparing  the  course  of  prices  during  the  greenback 
period  with  changes  in  the  supply  of  money  we  must  take  into 
account  four  important  facts  :  (i)  the  supply  of  money  during 
part  of  this  period  included  other  legal-tender  paper  besides  the 
greenback  ;  (2)  bank  notes,  fractional  currency,  etc.,  although 
part  of  the  currency  supply,  were  not  part  of  the  money  supply; 

(3)  depreciated  credit  money  was  issued  by  the  Confederacy; 

(4)  the  demand  for  money  was  subject  to  great  changes. 

i.  March  3,  1863,  Congress  authorized  the  issue  of  $400,000,- 
ooo  legal-tender  Treasury  notes,  which  were  to  bear  interest  at 
not  over  6  per  cent.  They  were  intended  for  use  as  a  medium 
of  exchange,  but  no  denominations  under  $10  were  permitted. 
The  total  issues  under  this  law  were  as  follows  :  $44,520,000  in 
one-year  notes,  $166,480,000  in  two-year  notes,  and  $266,595,- 
ooo  in  three-year  compound-interest  notes.  All  these  notes, 
since  they  were  legal  tender,  belong  in  the  same  category  as 
the  greenbacks  and  must  be  reckoned  as  part  of  the  country's 
supply  of  money.  They  were  not  a  convenient  medium  of 
exchange,  for  their  interest  feature  gave  them  increasing  value 
from  day  to  day ;  but  in  the  reserves  of  banks  they  were  as 
serviceable  as  the  greenback  itself.  As  a  basis  of  credit,  there- 
fore, these  notes  had  almost  the  same  effect  upon  prices  as 


274  MONEY  AND  CURRENCY 

would  have  been  exerted  by  an  equal  quantity  of  greenbacks. 
There  is  no  means  of  ascertaining  what  proportion  of  them  was 
held  by  banks  or  how  many  were  held  as  an  investment  by 
private  persons ;  hence  no  exact  estimate  can  be  made  of  the 
quantity  of  fiat  money  in  existence  during  this  period.  In  1864 
the  outstanding  issues  of  these  notes  amounted  to  $178,000,- 
ooo,  and  in  1865  to  $242,000,000.  Thereafter  there  was  a 
steady  decline  in  the  amount  outstanding  until  1872,  when  all 
had  been  retired.  Although  we  cannot  be  certain  of  the  extent 
to  which  these  notes  performed  the  function  of  money,  it  would 
manifestly  be  an  error  not  to  treat  them  as  part  of  the  supply. 

Another  element  of  uncertainty,  especially  during  the  first 
three  years  of  the  period,  relates  to  the  use  of  gold.  After 
1 86 1  coins  of  this  metal  ceased  to  circulate,  the  greenback 
being  the  cheaper  money.  Very  little  gold,  however,  was 
exported  from  the  United  States  until  1865,  and  it  is  quite 
probable  that  between  1862  and  1865  many  bankers,  although 
they  paid  out  no  gold  over  their  counters,  based  their  credits 
to  some  extent  on  their  holdings  of  this  metal,  for  it  was  easily 
and  quickly  convertible  into  greenbacks.  There  is  no  reason 
for  believing  that  this  was  the  general  practice  among  bankers, 
but  that  it  prevailed  to  some  extent  cannot  be  doubted.  Never- 
theless after  1862  we  cannot  properly  consider  the  stock  of 
gold  in  the  country  as  part  of  the  money  supply.  In  the  vaults 
of  banks  it  was  regarded  very  much  as  government  bonds  are 
at  the  present  time,  that  is,  as  an  asset  easily  convertible  into 
lawful  money. 

2.  It  is  important  to  distinguish  clearly  between  money  and 
currency.  The  money  supply,  as  has  been  seen,  consisted  of 
greenbacks  and  other  forms  of  legal-tender  paper.  The  cur- 
rency included  these  and  all  kinds  of  non-legal-tender  credit 
money,  such  as  bank  notes,  subsidiary  silver,  and  fractional  cur- 
rency. Until  1865  most  of  the  country's  credit  money  consisted 
of  the  notes  of  state  banks,  which  were  redeemable  in  green- 
backs. After  1865  these  were  withdrawn  from  circulation  on 
account  of  a  prohibitory  tax,  the  notes  of  national  banks  taking 
their  place. 


FIAT   MONEY:    THE  GREENBACK  275 

As  bank  notes  were  not  legal  tender  they  could  not  serve  as 
a  banking  reserve  and  hence  could  not  exert  as  much  influence 
upon  prices  as  the  same  quantity  of  greenbacks.  As  "  hand-to- 
hand  money  "  these  bank  notes  were  a  substitute  for  green- 
backs and  so  rendered  more  greenbacks  available  for  use  in 
banking  reserves  than  would  have  been  available  had  the  notes 
not  been  issued.  These  notes,  therefore,  contributed  to  the 
maintenance  of  the  level  of  prices.  However,  since  they  were 
themselves  redeemable  in  greenbacks,  their  issue  not  only 
necessitated  a  reserve  of  greenbacks  but  was  limited  in  volume 
by  the  difficulty  of  obtaining  this  necessary  reserve.  It  is  evi- 
dently wrong  to  treat  the  bank  note  as  if  it  possessed  the  same 
potency  as  the  greenback;  it  was  only  one  of  many  forms  of 
credit,  all  of  which  were  contributing  to  the  support  of  prices. 
We  cannot  consider  bank  notes  part  of  the  money  supply,  nor 
should  we  expect  to  find  any  correspondence  between  their 
quantity  and  the  course  of  prices.  The  supply  of  bank  notes 
always  tends  to  increase  when  the  need  for  currency  increases. 
Generally  speaking,  therefore,  we  may  infer  from  an  increasing 
volume  of  bank  notes  not  that  a  rise  of  prices  will  result  but 
that  a  fall  of  prices  has  been  prevented.  While  we  may  expect 
to  find  that  the  course  of  prices  will  in  general  be  affected  by 
changes  in  the  supply  of  money,  there  is  no  reason  to  expect 
that  it  will  correspond  with  changes  in  the  supply  of  currency, 
or,  as  it  is  often  called,  the  "  total  circulation  "  of  the  country. 

3.  In  a  study  of  the  value  of  the  greenback  we  must  not 
ignore  the  fact  that  while  the  war  lasted  the  people  of  the 
South  had  a  money  of  their  own.  The  Treasury  notes  of  the 
Confederacy,  although  not  a  legal  tender,  were  receivable  for 
all  public  dues.  They  never  possessed  perfect  acceptability  as 
money,  yet  in  some  parts  of  the  South  they  became  the  com- 
mon medium  of  exchange.  Throughout  the  war  the  South  was 
practically  without  a  recognized  standard.  The  people  used 
greenbacks  to  some  extent,  and  sometimes  their  exchanges 
were  effected  by  the  use  of  gold.  Strictly  speaking,  the  $500,- 
000,000  of  paper  money  issued  by  the  Confederacy  constituted 
a  part  of  the  country's  money  supply  during  the  Civil  War. 


276  MONEY  AND   CURRENCY 

We  cannot,  however,  class  the  Confederate  note  with  the  green- 
back. It  can  be  given  recognition  merely  as  one  of  the  factors 
lessening  the  demand  for  greenbacks,  for  to  some  extent  it 
satisfied  the  South's  demand  for  money.1 

4.  The  monetary  needs  of  a  country  are  not  the  same  in  war 
as  in  peace.  When  half  the  men  of  a  country  go  out  of  its 
factories  and  business  houses  into  military  camps,  prepared  to 
destroy  wealth  instead  of  to  create  it,  their  wages  cut  to  a  pit- 
tance, it  is  evident  that  the  production  of  wealth  must  decrease 
and  that  the  volume  of  exchanges  must  decline.  As  a  result 
there  should  be  a  lessened  demand  for  money  and  a  tendency 
of  prices  to  rise  if  the  supply  of  money  is  not  reduced.  If, 
however,  the  issue  of  a  war  is  doubtful,  and  the  people  fear 
hostile  invasion  and  the  violation  of  business  contracts,  a  con- 
traction of  credit  is  likely  to  result,  business  is  brought  more 
and  more  to  a  cash  basis,  and  the  demand  for  money,  instead 
of  being  lessened  by  war,  may'be  increased  and  prices  fall.  But 
if  credit  is  not  disturbed,  a  war  which  draws  a  large  part  of  the 
male  population  away  from  trade  and  industry  will  work  a 
decrease  in  the  demand  for  money  and  a  corresponding  rise  of 
prices.  The  common  notion  that  war  increases  the  demand  for 
money  grows  out  of  the  confusion  of  money  with  capital.  Gov- 
ernments borrow  immense  sums  during  a  war  and  the  rate  of 
interest  usually  rises  in  consequence ;  but,  as  was  pointed  out 
in  Chapter  VII,  the  demand  for  capital  is  not  a  demand  for 
money. 

QUESTION  OF  DEMAND  AND  SUPPLY 

187.  The  demand  for  the  greenback  as  money  in  1862  must 
certainly  have  been  much  less  than  had  been  the  demand  for 
gold  in  preceding  years,  for  the  country  had  been  split  in  two, 
so  that  the  monetary  demand  brought  to  bear  upon  the  green- j 
back  came,  for  the  most  part,  from  only  one  section.  There  is 
no  evidence  that  the  people  of  the  North  lost  confidence  in 

1  The  greenback  never  became  the  money  of  the  South.  From  1865  to  1879, 
while  the  North  was  on  a  greenback,  fiat-money  basis,  in  many  sections  of  the 
South  business  was  conducted  upon  a  specie  basis. 


JEY:    THE  GREENBACK  277 


their  banks  or  that  the  use  of  credit  instruments  was  to  any 
large  extent  curtailed.  Inasmuch , as  the  need  for  money  was 
reduced  by  the  withdrawal  of  several  hundred  thousand  men 
from  gainful  occupations,  it  seems  reasonable  to  say  that  the 
war  caused  in  the  North  a  lessening  of  the  demand  for  money. 
Even,  therefore,  if  the  money  supply  of  the  North  had  not  been 
increased,  prices  would  naturally  have  been  higher. 

In  1 865  the  armies  of  the  North  and  the  South  were  disbanded. 
There  were  two  reasons  why  the  demand  for  money  should 
then  increase,  (a)  Several  hundred  thousand  men  returned  to 
the  paths  of  industry  and  business,  greatly  increasing  the 
volume  of  exchanges,  (b}  In  so  far  as  the  people  of  the  S^uth 
made  use  of  the  greenback,  a  new  and  additional  demancf  for  it 
arose,  and  this  demand  tended  to  increase  as  time  passed  and 
the  prejudice  against  the  greenback  wore  away.  We  should 
naturally  expect,  therefore,  on  account  of  tliis  enlarged  mone- 
tary demand,  that  the  close  of  the  war  would  be  followed  by  a 
rise  in  the  value  of  greenbacks  and  by  a  fall  of  prices. 

1 8 8.  We  cannot  get  exact  data  with  regard  either  to  the 
supply  of  money  or  to  the  forces  governing  the  demand.  The 
data  presented  in  the  following  tables  are  estimates  and  can  be 
only  approximately  correct.  The  reader  must  beware  of  think- 
ing that  positive  conclusions  can  be  drawn  from  a  study  of  the 
statistics  and  charts  which  follow.  They  suggest  inferences 
and  explanations  when  viewed  in  the  light  of  sound  theory,  and 
it  is  for  that  reason  they  are  presented. 

The  table  on  page  278  shows  the  constituent  elements  of  the 
supply  of  money  and  currency  from  1860  to  1879.  During  1860 
and  1 86 1  the  money  supply  consisted  entirely  of  gold;  thereafter 
of  greenbacks  and  other  legal-tender  paper.1  The  supply  of 

1  This  "  other  legal-tender  paper "  included  the  one-  and  two-year  notes  of 
March  3,  1863,  the  compound-interest  notes  of  June  30,  1864,  and  the  3  per  cent 
certificates  of  March  2,  1867.  The  government  issued  other  forms  of  certificates 
which  doubtless  did  some  service  as  money,  for  public  creditors  were  obliged  to 
accept  them.  The  figures  for  the  amount  of  gold  in  the  country  (column  I)  are 
taken  from  Muhleman's  Monetary  Systems  of  the  World,  pp.  60-61,  except  that 
the  estimate  of  $100,000,000  in  gold  in  use  as  money  in  1862  is  my  own.  After 
1862  gold  is  left  out  of  account;  the  Pacific  coast  states,  where  its  use  was  con- 
tinued, were  from  the  monetary  point  of  view  a  foreign  country. 


278 


MONEY  AND   CURRENCY 


greenbacks  increased  steadily  until  1865,  then  declined  until 
1873,  after  which  date  there  was  little  change.  The  supply  of 
currency  also  increased  in  the  same  proportion  until  1865,  and 

STATISTICS  OF  GREENBACK  PERIOD 
(In  Millions  of  Dollars) 


I 

Gold 

II 

Green- 
backs 

III 
Other 
Legal 
Tender 

IV 

Total 
Money 

V 

Bank 

Notes 

VI 
Other 
Credit 
Money 

VII 
Total 
Credit 
Money 

VIII 

Total 
Currency 

1860 
1861 

235 
250 

^35 
250 

207 
202 

207 
202 

442 
452 

1862 
1863 

IOO 

ISO 
391 

250 
391 

I84 
239 

20 

184 
259 

434 
650 

1864 
1865 

447 

43  i 

I78 
242 

625 
673 

210 
289 

23 
25 

233 
3M 

858 

987 

1866 
1867 

401 
372 

1  80 
135 

58l 

5°7 

3OI 
303 

27 
28 

328 
331 

909 
838 

1868 
1869 

356 
356 

!°5 

55 

461 
411 

303 

3°3 

33 
32 

336 

335 

797 
746 

1870 
1871 

356 
356 

48 
32 

404 
388 

302 
320 

40 
4i 

342 
361 

746 
749 

1872 
1873 

356 
356 

12 

368 

356 

340 

347 

4i 

47 

38i 
39i 

749 
750 

1874 
1875 

382 
376 

382 
376 

352 
354 

5° 
56 

402 
410 

784 
786 

1876 
1877 

370 
360 

370 
360 

333 
3i7 

61 

67 

39i 
384 

764 
744 

1878 
1879 

347 
347 

347 
347 

323 
329 

88 
117 

411 
446 

758 
793 

then  declined  somewhat  but  not  in  the  same  proportion  as  the 
supply  of  money;  for  after  1865  there  was  a  gradual  increase 
in  the  quantity  of  bank  notes  and  other  credit  money. 

The  figures  in  this  table  include  cash  in  the  United  States 
Treasury.    The  amount  of  this  was  not  large  and  did  not  greatly 


FIAT   MONEY 


3ACK 


279 


vary,  so  that  the  general  result  would  not  be  much  affected 
even  if  it  were  deducted  from  the  totals.  But  it  should  not  be 
deducted;  the  United  States  Treasury  is  one  of  the  largest 
business  organizations  in  the  country,  and  its  need  for  a  cash 
balance  is  legitimately  a  part  of  the  country's  monetary  demand. 

VALUE  OF  THE  GREENBACK 


Falkner  Index  Number 
(Greenback  Prices 

Greenback  Price  of 
Gold  Dollar 

Gold  Price  of  Green- 
back Dollar 

after  1861) 

1860 

100.0 

1861 

100.6 

1862 

117.8 

"3-3 

88.3 

1863 

148.6 

142.2 

68.9 

1864 

190.5 

203.3 

49-2 

1865 

216.8 

157.3 

63.6 

1866 

191.0 

140.9 

71.0 

1867 

172.2 

138.2 

72.4 

1868 

160.5 

'39-7 

71.6 

1869 

153-5 

i33-o 

75-2 

1870 

142.3 

114.9 

87.0 

1871 

136.0 

111.7 

89.5 

1872 

138.8 

112.4 

89.0 

1873 

137-5 

113.8 

87.9 

1874 

l33-° 

III.  2 

89.9 

1875 

127.6 

II4.9 

87.0 

1876 

118.2 

III.S 

89.8 

1877 

110.9 

104.3 

95-4 

1878 

101.3 

100.8 

99-2 

1879 

96.6 

1  00.0 

1  00.0 

The  above  table,  covering  the  same  period,  gives  the  Falkner 
index  number,  the  greenback  price  of  a  gold  dollar,  and  the 
gold  price  of  the  greenback  dollar.  The  Falkner  index  num- 
ber, although  imperfect  in  some  respects,  undoubtedly  corre- 
sponds in  a  general  way  with  the  actual  course  of  prices.  For 
this  period  it  is  the  only  index  number  available.  The  price  of 
gold  is  the  average  for  each  year. 


28o  MONEY   AND   CURRENCY 

Chart  III,  on  page  281,  enables  the  reader  at  a  glance  to 
compare  the  general  movement  of  prices  with  changes  in  the 
supply  of  money  and  currency.  The  heavy  black  line  shows 
changes  in  the  supply  of  money.  (From  1863  to  1872  this 
included  various  forms  of  legal-tender  paper.  Changes  in  the 
volume  of  greenbacks  alone  during  this  period  are  indicated  by 
a  crossed  line.)  The  linked  line  shows  changes  in  the  volume 
of  currency,  including  all  forms  of  money  and  credit  money. 
The  dotted  line  shows  the  rise  and  fall  of  commodity  prices  in 
greenbacks. 

The  chart  shows  a  surprising  tendency  on  the  part  of  the 
commodity  price  line  to  parallel  that  of  the  money  supply.  In 
the  four  years  following  July,  1861,  the  money  supply  increased 
from  $250,000,000  to  $673,000,000,  a  gain  of  over  170  per 
cent ;  in  the  same  period  prices  rose  from  100  to  217.  After 
1865  the  money  supply  decreased  and  prices  fell.  The  lines 
keep  together  until  1874,  after  which  date  the  price  line 
declines,  although  the  supply  of  money  remains  stationary. 

ANALYSIS  OF  PRICE  CHANGES 

It  is  worth  while  to  examine  these  movements  in  some  detail. 
For  convenience  we  will  divide  the  epoch  into  three  periods: 
(a)  the  War  Period,  1861  to  1865;  (b)  the  Fiat  Period,  1865  to 
1875;  (c)  the  Resumption  Period,  1875  to  1879.  The  first 
and  third  were  essentially  periods  of  transition  from  one  stand- 
ard to  another. 

189.  (a)  In  1860  the  country  was  upon  a  gold  basis,  and 
according  to  official  estimates  was  using  as  money  about  $250,- 
000,000  in  gold.  Free  coinage  of  silver  was  permitted,  but  only 
subsidiary  silver  was  in  use,  silver  dollars  having  a,  higher  value 
as  bullion  than  as  coin.  The  transition  year  of  1862  was  one  of 
monetary  chaos.  Not  until  toward  the  end  of  the  year  had  the 
people  become  accustomed  to  the  greenback.  The  people  of 
the  South  were  beginning  to  use  their  own  paper  money. 
What  the  real  supply  of  money  was  throughout  1862  it  is 
impossible  to  determine.  We  know  only  that  the  volume  of 


FIAT   MONEY:    THE  GREENBACK 


28l 


jUEUhXqp9o% 


UBf  pamrgM 


y 


913349 


grefaap 


jfti a * 


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I 


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«     « 


282  MONEY  AND   CURRENCY 

greenbacks  was  greatly  increased  in  that  year  and  that  the 
greenback  prices  of  commodities  immediately  began  to  rise. 
The  rapid  decline  in  the  value  of  the  greenback  between  1862 
and  1865  can  properly  be  attributed  to  three  causes  :  (i)  their 
increasing  quantity;  (2)  the  lessening  demand  for  money  on 
account  of  the  war  and  on  account  of  the  fact  that  the  South 
had  a  money  of  its  own;  (3)  the  fluctuating  acceptability  of 
the  greenback,  its  future  being  uncertain  as  long  as  the  war 
was  undecided. 

190.  (b]  During  the  second  period  (1865-1875)  the  greenback 
had  practically  lost  its  credit  characteristics  and  become  pure 
fiat  money.  While  no  one  knew  when  it  would  be  redeemed, 
there  was  no  longer  any  general  doubt  about  its  future.  A 
large  proportion  of  the  people  liked  the  greenback  so  well  that 
they  opposed  its  retirement.  A  strong  political  faction  de- 
manded that  it  be  made  the  permanent  money  of  the  country, 
and  had  sufficient  influence  in  1868  to  obtain  the  passage  of  an 
act  of  Congress  suspending  its  further  retirement  and  cancel- 
lation. The  effect  of  this  act  upon  national  credit  was  so  bad 
that  a  year  later  Congress  passed  what  is  known  as  the  Public 
Credit  Act,  in  which  the  pledge  was  made  that  the  obligations 
of  the  government  would  ultimately  be  redeemed  in  coin. 
Neither  of  these  acts  had  any  noticeable  effect  upon  the  appre- 
ciating tendency  of  the  greenback  as  revealed  by  the  prices  of 
commodities.  In  the  four  years  after  1865  both  the  price  level 
and  the  money  supply  declined  almost  as  much  as  they  had 
risen  in  the  preceding  four  years. 

This  appreciation  of  the  greenback,  or  fall  of  prices,  was  to 
be  expected ;  not  only  was  the  money  supply  decreasing  but 
the  demand  for  money  was  increasing  enormously,  for  all  the 
people  of  the  country  were  now  engaged  in  gainful  occupations. 
Except  on  the  Pacific  coast  and  in  parts  of  the  South  all  buy- 
ing and  selling  was  done  upon  a  greenback  basis,  and  except 
in  import  and  export  circles  all  price  lists  were  in  greenbacks. 
To  the  average  business  man  the  greenbacks  possessed  a  value 
of  their  own.  When  pricing  his  goods  he  no  longer  thought 
of  their  value  in  gold ;  knowing  what  they  had  cost  him  in 


FIAT    MONEY:    THE  GREENBACK  283 

greenbacks  and  what  were  the  prices  of  other  goods,  he  knew 
the  real  value  or  purchasing  power  of  the  greenback  and  priced 
his  goods  accordingly.  Only  to  the  importer  and  exporter  was 
the  gold  value  of  the  paper  money  of  prime  importance,  for 
the  one  was  necessarily  a  buyer  and  the  other  a  seller  of  gold 
exchange. 

The  reduction  of  the  money  supply  during  this  period  was 
mainly  due  to  the  retirement  of  the  legal-tender  compound- 
interest  notes.  To  what  extent  these  had  been  used  as  money 
is  not  known.  In  the  construction  of  the  chart  it  is  assumed 
that  all  of  these  notes  performed  a  money  function.  In  so  far 
as  this  is  beyond  the  facts  the  chart' exaggerates  changes  in 
the  money  supply  between  1863  and  1872. 

191.  (c)  The  third  period  begirfs  with  the  act  of  Congress, 
January  14,  1875,  which  ordered  that  the  Secretary  of  the 
Treasury  should  take  the  necessary  steps  for  the  resumption 
of  specie  payments  January  I,  1879.  This  Resumption  Act 
authorized  an  issue  of  bonds  to  any  amount  necessary  to 
accomplish  the  purpose,  and  provided  that  the  volume  of  green- 
backs, then  $382,000,000,  should  be  reduced  to  $300,000,000. 
Three  years  later  (May,  1878)  Congress  stopped  the  further 
retirement  of  greenbacks  ;  their  volume  was  then  $346,681,016, 
and  it  has  not  since  been  changed. 

Thus  it  happened  that  during  the  Resumption  Period  the 
supply  of  money  varied  but  little.  Commodity  prices,  however, 
continued  to  decline.  There  was  every  reason  why  they  should 
decline.  In  the  first  place,  the  acceptability  of  the  greenback 
as  money  was  firmly  established.  No  man  with  anything  to 
sell  had  the  slightest  doubt  about  the  greenback's  future  pur- 
chasing power.  Indeed,  such  doubt  had  practically  disappeared 
long  before  the  Resumption  Act  was  passed.  In  the  second 
place,  depression  ruled  in  the  business  world,  the  panic  of 
1873  having  given  a  severe  shock  to  both  capital  and  credit. 
Between  1874  and  1878  the  total  deposits  of  national  banks 
made  no  increase,  and  the  clearings  of  the  New  York  banks 
declined  from  $33,000,000,000  in  1872  to  $23,000,000,000  in 
1878.  This  contraction  of  credit  necessarily  meant  a  lessened 


284  MONEY  AND   CURRENCY 

monetary  demand  for  goods  and  consequently  a  fall  of  prices. 
A  similar  phenomenon  was  observed  after  the  panic  of  1893. 
Furthermore,  during  the  ten  years  prior  to  1879  there  had  been 
a  normal  growth  of  population,  the  railroad  builder  had  opened 
up  large  sections  of  new  territory,  and  numerous  new  industries 
had  been  established.  In  spite  of  these  developments,  all  of 
which  increased  the  demand  for  money,  the  supply  of  money  in 
1879  was  *ess  ^an  in  1869.  That  prices  should  be  lower  was 
natural  and  inevitable. 

During  the  Resumption  Period  the  greenback  gradually  lost 
its  fiat-money  characteristics.  The  practical  certainty  of  its 
redemption  in  gold  gave  it  almost  perfect  acceptability  as 
money  and  made  its  value  relation  to  gold  of  considerable 
importance  as  a  factor  in  determining  its  value  relation  to 
goods.  This  factor,  however,  was  not  all  important ;  it  merely 
prevented  the  depreciation  of  the  greenback  below  a  certain 
point.  So  long  as  men  believed  that  the  greenback  would  be 
redeemed  in  1879  tney  would  naturally  refuse  to  exchange  it 
for  goods  at  prices  very  much  above  the  level  of  gold  prices. 

192.  A  comparison  of  the  course  of  prices  with  the  supply 
of  currency  would,  as  already  explained,  possess  little  or  no 
significance.  However,  even  if  the  "  total  circulation "  were 
an  important  factor  in  the  determination  of  prices,  the  varia- 
tions in  its  volume  during  the  greenback  era  would  lead  to  no 
conclusions  antagonistic  to  those  we  have  already  reached,  for 
those  variations  correspond  very  closely  with  contemporary 
variations  in  the  money  supply.  The  total  currency  in  the 
country  in  1878  was  no  greater  than  in  1869,  although  the 
population  had  increased  30  per  cent.  There  cannot  be  any 
doubt  that  the  demand  for  money  and  currency  was  greater  in 
1878  than  in  1869,  or  that  the  supply  of  currency  and  money 
in  1878  was  not  sufficient  to  consummate  the  increased  volume 
of  exchanges  at  the  old  high  level  of  prices.  The  amount  of 
"  hand-to-hand  money  "  that  a  country  will  absorb  depends  very 
much  on  the  prosperity  of  the  people,  being  undoubtedly  larger 
in  good  times  than  in  dull.  Additional  issues  of  credit  money 
do  not  satisfy  an  increasing  demand  for  money. 


FIAT   MONEY:   THE  GREENBACK  285 

GREENBACKS  AND  THE  PRICE  OF  GOLD 

193.  In   view  of   the  fact   that   many  writers   have  either 
tacitly  or  expressly  indorsed  the  opinion  that  the  purchasing 
power  of  the  greenback,  or  value  in  goods,  was  determined  by 
its  gold  price,  a  brief  analysis  of  this  matter  is  worth  while. 
When  the  greenbacks  were  first  issued  in  1862,  gold  payments 
having  then  been  suspended,  a  gold  dollar  was  worth  more 
than  a  dollar  in  greenbacks.    Gold  became  a  commodity  like 
other  metals,  and  its  greenback  price  was  regularly  quoted  in 
New  York  City.    As  the  greenback  depreciated,  the  price  of 
gold  rose,  as  did  the  prices  of  other  commodities.    After  1865, 
when  the  greenback  was  appreciating,  the  price  of  gold  fol- 
lowed  the  general   tendency   of  prices.     Did   the  greenback 
appreciate  after  1865  because  the  price  of  gold  was  falling? 
or  did  the  price  of  gold  fall  because  the  greenback  was  appre- 
ciating?   These  questions  bring  out  the  point  at  issue. 

Chart  IV,  on  page  286,  will  enable  the  reader  to  compare  the 
movements  of  general  prices  with  changes  in  the  greenback 
price  of  gold.  The  dotted  line  represents  commodity  prices  in 
greenbacks  ;  the  black  line,  the  price  of  gold  in  greenbacks  ; 
the  chained  line,'  the  supply  of  money.  For  the  years  1862 
to  1865  these  lines  represent  quarterly  averages,  the  index 
number  of  commodity  prices  being  taken  from  the  Monetary 
Commissions  Report,  p.  463.  After  1865  the  lines  indicate 
only  the  annual  average  prices  of  both  gold  and  commodities. 
The  reader  will  notice  that  there  is  a  general  correspondence 
throughout  the  chart  between  the  gold  line  and  the  commodity 
line.  The  price  of  gold  reached  its  maximum  in  1864  and  com- 
modity prices  touched  their  highest  point  in  1865.  Both  lines 
fall  sharply  during  1865,  but  the  fall  in  the  price  of  gold  is 
much  greater  than  in  the  prices  of  commodities.  After  1865 
the  gold  line  remains  considerably  lower  than  the  commodity 
line  until  1878. 

194.  In    considering  the   relation  between   gold  and    com- 
modity prices  during  this  period  we  must  first  note  that  the 
prices  of  all  imported  commodities  must  have  closely  followed 


286 


MONEY  AND   CURRENCY 


FIAT   MONEY:   THE  GREENBACK  287 

the  fluctuations  in  the  price  of  gold.  Purchasers  paid  for  them 
with  gold,  and  were  compelled,  therefore,  when  selling  their 
goods  for  greenbacks,  to  take  into  account  the  value  of  gold  in 
greenbacks.  The  prices  of  all  imported  goods  therefore  rose 
and  fell  with  gold.  So  also  the  greenback  prices  of  leading 
articles  of  export  must  have  been  affected  by  changes  in  the 
gold  value  of  the  greenback.  Exporters  to  countries  upon  a 
gold  basis  received  gold  (or  gold  exchange)  in  payment,  and 
this  they  sold  for  greenbacks  ;  hence  a  rise  in  the  greenback 
price  of  gold,  since  it  increased  the  greenback  profits  of 
exporters,  stimulated  the  export  demand  for  certain  articles 
and  caused  their  prices  also  to  rise. 

But  the  fact  that  the  prices  of  leading  articles  of  import  and 
export  must  have  been  influenced  by  fluctuations  in  the  green- 
back price  of  gold  by  no  means  proves  that  the  value  or  pur- 
chasing power  of  the  greenback  hinged  upon  its  value  relation 
to  gold.  It  could  as  easily  be  proved  that  the  value  of  the 
greenback  depended  on  its  value  relation  to  silver,  for  the 
prices  of  all  articles  exported  to  or  imported  from  countries 
upon  a  silver  basis  must  have  reflected  changes  in  the  green- 
back price  of  silver,  a  fall  in  that  price  stimulating  imports 
until  the  prices  of  the  imported  articles  had  fallen  correspond- 
ingly, while  a  rise  in  that  price  would  necessarily  have  stimu- 
lated the  export  demand  for  such  of  our  goods  as  were  wanted 
in  countries  on  a  silver  basis. 

Since  the  bulk  of  our  foreign  trade  was  with  Europe,  which 
was  upon  a  gold  basis,  the  greenback  prices  of  many  commodi- 
ties tended  to  follow  pretty  closely  variations  in  the  greenback 
price  of  gold.  If  our  largest  trade  had  been  with  Mexico,  India, 
and  the  Orient,  our  prices  would  have  been  influenced  rather 
by  the  greenback  value  of  silver.1 

195.  In  the  second  place,  it  should  be  noted  that  the  green- 
back price  of  gold  was  in  the  main  the  product  of  expert 

1  The  influence  of  world  forces  upon  the  prices  of  certain  articles  is  tersely 
expressed  by  Mr.  Roberts,  Director  of  the  Mint:  "Goods  in  every  country  are 
attached  to  the  world's  standard  whether  the  money  is  or  not  "  (Report  for  1898, 
p.  168). 


288  MONEY  AND   CURRENCY 

estimates  as  to  the  future  value  of  the  greenback.  Gold  was 
a  subject  of  speculation.  It  was  bought  and  sold  like  corn, 
wheat,  and  cotton.  Its  greenback  price  reflected  the  judgment 
of  experts  as  to  the  future  value  of  greenbacks.  A  buyer  of 
gold  was  a  seller  of  greenbacks,  and  a  seller  of  gold  a  buyer 
of  greenbacks.  Any  condition  that  promised  an  increase  in  the 
value  of  the  greenback  caused  a  fall  in  the  price  of  gold ;  any 
circumstance  that  threw  doubt  upon  the  greenback  caused 
a  rise  in  the  price  of  gold.  For  example,  between  1866  and 
1869  the  greenback  price  of  gold  did  not  decline,1  yet  the  value 
of  the  greenback  with  respect  to  commodities  in  general  rapidly 
advanced  during  this  period.  In  these  years  the  expert  judg- 
ment of  the  country  was  in  doubt  about  the  future  of  the  green- 
back ;  hence  its  value  with  respect  to  gold  did  not  advance. 
A  strong  political  faction  was  opposed  to  its  retirement,  and 
there  was  a  possibility  that  the  supply  might  be  indefinitely 
increased.  Early  in  1869  Congress  passed  the  Public  Credit 
Act  pledging  the  ultimate  redemption  of  the  greenback  in  coin. 
This  act  had  no  effect  upon  commodity  prices,  i.e.  upon  the 
value  of  the  greenback,  but  did  cause  an  immediate  fall  in 
the  price  of  gold.  These  facts  indicate  that  fluctuations  in  the 
price  of  gold,  instead  of  being  the  cause  of  changes  in  the  prices 
of  commodities,  were  rather  the  effect  of  such  changes. 

In  the  same  way  prices  in  Wall  Street  reflect  the  expert 
judgment  of  the  country  in  regard  to  industrial  prospects. 
Railroad  earnings  do  not  decline  because  stocks  fall ;  on  the 
contrary,  stocks  fall  because  a  decline  of  railroad  earnings  is 
anticipated.  When  conditions  warrant  the  expectation  of  larger 
dividends  the  stock  market  is  buoyant ;  when  an  opposite  state 
of  affairs  prevails  it  is  depressed.  The  speculation  in  gold  was 
in  every  way  analogous  to  speculation  in  stocks.  The  green- 
back was  the  real  subject  of  speculation,  and  its  value  as 
revealed  by  general  prices  was  determined  by  the  demand  for 
it  as  money.  After  1865  it  steadily  appreciated  because  this 
money  demand  increased  with  the  growth  of  the  country. 
During  the  five  years  following  the  close  of  the  war  there 

1  The  average  price  of  gold  in  April,  1866,  was  127  ;  in  May,  1869,  it  was  139. 


FIAT   MONEY:    THE  GREENBACK  289 

was  considerable  uncertainty  about  its  future  ;status ;  a  strong 
sentiment  developed  in  favor  of  its  permanent  retention  as  the 
money  of  the  country  ;  Congress  stopped  its  retirement  in  1868, 
but  in  1869  declared  that  it  must  some  day  be  redeemed.  All 
these  uncertainties  were  recorded  with  great  sensitiveness  by 
the  fluctuations  in  the  greenback  price  of  gold.  They  seem, 
however,  to  have  had  no  effect  whatever  upon  prices  in  general. 
The  Public  Credit  Act  of  1869  evidently  convinced  expert  judg- 
ment that  the  greenback  was  destined  to  appreciate.  On  no 
other  hypothesis  can  the  fact  be  explained  that  the  price  of 
gold  during  the  next  ten  years  was  constantly  far  below  the 
average  of  general  prices. 

196.  Finally,  it  is  impossible  to  explain  the  greenback  price 
of  gold  on  the  hypothesis  that  it  represented  an  investment 
demand  for  the  greenbacks.  After  the  Public  Credit  Act  of 
1869  the  price  of  gold  fell  to  115.  This  meant  that  in  the 
opinion  of  experts  a  dollar  in  greenbacks  was  worth  about  90 
cents  in  gold.  There  was  certainly  no  reason  for  believing  that 
the  greenback  would  be  redeemed  in  gold  within  two  years ; 
yet  an  investment  demand  strong  enough  to  make  it  worth  90 
cents  in  gold  could  not  have  existed  without  a  confident  belief 
that  it  would  be  redeemed  within  that  period.  In  the  seventies 
5  per  cent  was  the  rate  of  interest  which  satisfied  investors  in 
bonds.  Hence,  as  the  result  of  an  investment  demand  born  of 
confidence  in  its  redemption,  the  greenback  dollar  on  January  I, 
1877,  —  even  though  there  prevailed  absolute  confidence  in  the 
success  of  resumption  two  years  later,  —  should  not  have  been 
worth  over  90  cents  in  gold;  yet  $100  in  greenbacks  was  then 
worth  $94.40  in  gold.  In  January,  1875,  the  present  worth  of 
$100  in  greenbacks  as  an  investment  was  only  $80  in  gold,  yet 
their  actual  gold  value  was  $89. 

The  greenback  was  much  more  than  a  mere  government 
bond  bearing  no  interest  and  maturing  in  1879.  It  was  legal 
tender  for  the  payment  of  all  debts  and  was  in  universal  demand 
for  that  purpose.  For  five  years  before  1875,  when  the  date  of 
resumption  was  uncertain,  the  gold  price  of  the  greenback 
ranged  from  87  to  90.  It  is  impossible  to  account  for  this  high 


290  MONEY  AND  CURRENCY 

valuation  on  the  supposition  that  it  was  due  to  an  investment 
demand  or  to  increased  confidence  in  the  ultimate  redemption 
of  the  greenback  as  a  government  obligation.  The  greenback's 
value  was  due  not  to  an  investment  demand  but  to  the  service 
which  it  performed  as  money.  The  definite  promise  of  redemp- 
tion in  1875  merely  increased  its  acceptability  and  marked  a 
minimum  below  which  its  value  could  not  fall. 

LITERATURE 

The  subject  of  fiat  money  has  not  received  the  independent  scientific 
treatment  that  it  deserves.  The  reader  will  find  some  discussion  of  the 
subject  in  the  following:  F.  A.  WALKER,  Money;  J.  S.  MILL,  Political 
Economy,  Book  III,  chaps,  vii,  viii,  and  xiii ;  N.  G.  PIERSON,  Economics, 
passim;  J.  A.  NICHOLSON,  A  Treatise  on  Money ;  WHITE,  Money  and 
Banking,  Book  II. 

The  use  of  fiat  money  is  advocated  in  the  following :  A.  J.  FONDA, 
Honest  Money  (New  York,  1895)  ;  B.  A.  HILL,  Absolute  Money  (St.  Louis, 
1875)  5  A-  DEL  MAR,  The  Science  of  Money. 

An  excellent  brief  story  of  greenback  issues  is  given  in  WHITE'S  Money 
and  Banking,  Book  II,  chap.  iii.  Other  books  treating  of  greenbacks: 
W.  C.  MITCHELL,  A  History  of  the  Greenbacks  (Chicago,  1903)  ;  J.  J. 
KNOX,  United  States  Notes  (New  York,  1892)  ;  A.  B.  HEPBURN,  History 
of  Coinage  and  Currency  in  the  United  States  (New  York,  1903). 


CHAPTER  XIV 
FIAT  MONEY  IN  FOREIGN  COUNTRIES 

197.  England's  experience  with  depreciated  bank  notes  from  1797  to  1821  illus- 
trates the  use  of  fiat  money.  198.  Austria's  experience  with  fiat  money  from  1848 
until  1900.  199.  History  of  the  credit  ruble  in  Russia.  200.  Russia's  transition 
from  a  fiat  to  the  gold  standard.  201.  British  India's  involuntary  experience  with 
fiat  money  from  1893  to  l&99-  2O2-  Tne  erroneous  view  that  gold  became  the 
standard  of  India  as  soon  as  the  free  coinage  of  silver  was  suspended  in  1893. 
203.  A  comparison  of  changes  in  the  value  of  the  rupee  after  1893  w^tn  changes 
in  gold  and  silver.  204.  For  two  or  three  years  India  was  practically  upon  a 
joint  standard,  the  fiat  rupee  and  the  commodity  gold  being  both  legal  tender. 
205.  Brief  reference  to  other  fiat  systems.  206.  The  advantages  claimed  for  fiat 
money:  (i)  Economy;  (2)  Stability  of  value;  (3)  No  "cornering"  possible. 
207.  Three  objections  to  so-called  ideal  money :  (i)  Doubt  as  to  its  practicability  ; 
(2)  Danger  of  inflation  ;  (3)  Its  fluctuating  relation  to  other  standards.  208.  The 
agitation  for  paper  money  in  the  United  States  has  not  been  based  on  scientific 
principles.  209.  The  evils  of  paper  money  based  on  property  illustrated  by  the 
French  assignat.  210.  In  no  country  could  pure  fiat  money  have  a  firmer  basis 
than  the  caprice  of  a  single  generation. 

197.  England's  experience  with  depreciated  bank  notes  a 
century  ago  will  be  found  on  analysis  to  confirm  the  conclusions 
reached  in  the  last  chapter.  In  1797,  when  England  and  her 
allies  were  at  war  with  Napoleon,  there  was  fear  lest  the  coun- 
try might  lose  all  its  gold.  To  prevent  this  an  unwise  act  of 
Parliament  forbade  the  Bank  of  England  to  redeem  its  notes. 
This  so-called  Restriction  Act  remained  in  force  until  1821, 
when  specie  payment,  or  redemption  of  bank  notes  in  gold,  was 
resumed. 

During  this  period  the  inconvertible  notes  of  the  Bank  of 
England  were  the  standard  of  prices.  Although  nominally 
credit  money,  they  were  in  reality  fiat  money.  For  a  few  years 
they  maintained  their  face  value  in  gold,  but  excessive  issues 
soon  brought  them  to  a  discount.  In  1810  the  premium  on 
gold  was  about  16  per  cent.  The  steady  rise  of  prices  had 

291 


292  MONEY  AND  CURRENCY 

stimulated  imports  and  so  brought  about  the  export  of  all  the 
gold  in  the  country.1 

In  1810  a  parliamentary  commission,  of  which  the  economist 
Ricardo  was  a  member,  put  forth  the  famous  "  Bullion  Report," 
in  which  the  currency  disorders  were  clearly  analyzed  and  the 
resumption  of  specie  payments  was  strongly  recommended.  As 
this  Bullion  Report  pointed  out,  the  depreciation  of  the  bank 
notes  was  due  to  their  excessive  quantity,  not  to  a  scarcity  of 
gold  nor  to  any  distrust  of  the  bank  note.  Indeed,  as  money 
the  English  people  apparently  liked  the  notes  better  than  gold. 
Nobody  ever  questioned  their  value  or  their  prospects,  for  there 
was  never  any  doubt  about  the  intention  of  Parliament  to  com- 
pel ultimate  redemption  or  about  the  ability  of  the  Bank  to 
redeem.  Confidence  in  the  bank  note  was  practically  complete 
and  unchanging,  yet  its  gold  value  was  a  matter  of  daily  fluctua- 
tion. The  notes  of  the  Bank  of  England  were  fiat  money,  and 
their  value  with  respect  to  goods  depended  not  on  the  prospects 
of  redemption  but  on  the  relation  between  their  supply  and  the 
need  for  money  in  England.2 

FIAT  MONEY  IN  AUSTRIA 

198.  Austria  has  had  a  long  and  unhappy  experience  with 
fiat  paper  money.  During  the  Hungarian  revolution  of  1848, 
when  the  monetary  unit  was  the  florin  (or  gulden)  of  171.449 
grains  of  pure  silver,  the  state  bank  suspended  the  redemption 
of  its  notes.  From  that  time  until  the  end  of  the  century 
the  only  money  of  the  country  consisted  of  the  state  bank 
notes  and  imperial  treasury  notes,  both  legal  tender  and  only 
nominally  redeemable  in  coin.  One  attempt  to  resume  specie 
payments  in  1859  was  blocked  by  war  with  Italy,  and  another 

1  When  depreciated  credit  money  is  issued  to  excess  the  prices  of  commodities 
in  general  rise  before  the  price  of  gold,  for  the  latter  is  not  affected  until  the 
decrease  of  exports  has  created  an  international  balance  to  be  settled  with  gold. 
This  natural  order  may  be  reversed,  of  course,  whenever  a  speculative  demand  for 
gold  is  added  to  that  of  importers. 

2  The  value  of  the  notes  was  indicated  by  the  prices  of  goods;  their  value  in 
gold,  by  the  premium  on  gold.    The  latter,  but  not  the  former,  was  influenced 
by  England's  fortune  in  war. 


FIAT   MONEY   IN   FOREIGN   COUNTRIES          293 

in  1866  by  war  with  Prussia.  Until  1870  both  gold  and  silver 
were  at  a  premium  of  from  12  to  25  per  cent.  After  1870, 
when  the  gold  value  of  silver  began  to  fall,  the  value  of 
Austrian  paper  money  with  respect  to  silver  steadily  rose  until 
in  1878  it  reached  parity  with  silver.  As  the  law  permitted 
the  free  coinage  of  silver,  new  coins  at  once  came  into  circu- 
lation;  but  in  1879  the  free  or  private  coinage  of  silver  was 
stopped,  the  silver  coins  being  thereby  made  fiat  money.  It 
was  generally  understood  at  the  time  that  the  government 
would  some  day  adopt  the  gold  standard,  but  it  was  not  known 
what  weight  of  gold  would  be  adopted  as  the  monetary  unit 
or  in  what  value  of  gold  the  paper  florin  would  ultimately  be 
redeemed.  Owing  to  measures  strictly  limiting  the  issues  the 
value  of  the  paper  currency  steadily  rose  after  1878  until  it 
became  worth  more  than  the  silver  bullion  in  the  coins  by 
which  it  could  be  legally  redeemed.  After  1879  Austria  was 
without  even  any  pretense  to  a  metal  standard.  Its  money 
consisted  of  inconvertible  paper  and  fiat  silver  guldens,  the 
latter  being  worth  more  than  the  silver  they  contained.  The 
general  expectation  that  the  paper  money  would  some  day  be 
redeemed  in  a  gold  coin  worth  more  than  171.449  grains  of 
silver  undoubtedly  had  something  to  do  with  the  increase  in  the 
value  of  the  paper  money,  for  its  acceptability  as  a  medium  of 
exchange  was  thereby  increased  ;  but  that  this  was  an  impor- 
tant factor  in  determining  its  value  cannot  be  maintained,  for 
no  man  knew  in  what  weight  of  gold  the  bank  note  would  be 
finally  redeemed.  The  Austrian  paper  and  silver  money  during 
this  period  was  fiat  money,  and  its  value  was  the  result  of 
Austria's  monetary  demand. 

In  1892  a  law  was  passed  providing  for  the  adoption  at  an 
early  date  of  the  gold  standard  and  naming  as  the  monetary 
unit  the  crown1  (krone),  a  coin  containing  4.705  grains  pure  gold 
(.304878  grams).  A  silver  or  paper  florin  was  rated  as  equal 

1  One  kilogram  of  pure  gold  is  coined  into  3280  crowns.  The  crown  is 
divided  into  100  heller.  The  old  florin  or  gulden  contained  100  kreutzer.  The 
halving  of  the  monetary  unit  in  1894  was  done  in  deference  to  the  popular  notion 
that  a  small  unit  works  advantageously  to  the  poor. 


294  MONEY  AND   CURRENCY 

to  two  gold  crowns,  although  at  the  time  the  paper  florin  was 
worth  6  per  cent  less  than  this  amount  of  gold.  Theoretically 
the  adoption  of  this  new  monetary  unit  involved  a  debasement 
of  the  standard  equal  to  about  15  per  cent.  At  the  ratio  of 

15.5  to  i,  which  prevailed  when  the  paper  money  became  incon- 
vertible, the  silver  florin  (171.449  grains  pure  silver)  was  worth 

1 1. 06  grains  of  gold,  whereas  two  crowns  contain  only  9.51 
grains.    This  debasement  with  reference  to  gold  was  evidenced 
in  1892  by  the  different  rates  of  premium  commanded  by  the 
old  gold  florins  and  the  new  gold  crowns,  the  florins  being  at 
25  per  cent  premium  in  paper  money,  the  crowns  at  6  per  cent. 
The  old  eight-florin  gold  piece  exactly  equaled  a  French  napo- 
leon (21  francs),  whereas  20  of  the  new  gold  crowns  equaled 
only  21  francs.1    A  comparison  with  American  money  shows 
the  same  differences ;   the  old    silver  florin  in  1 848  equaled 
about  47  cents,  but  the  florin  of  to-day  (two  crowns)  is  worth 
only  40.6  cents. 

The  real  standard  of  Austria,  however,  was  not  debased  by 
the  law  of  1894;  on  the  contrary,  it  was  raised  6  per  cent. 
The  real  standard  was  the  paper  florin,  which  had  a  value  of 
its  own  independent  of  either  silver  or  gold.  The  law,  having 
named  a  new  unit  of  gold,  properly  gave  the  paper  florin  such  a 
rating  with  respect  to  the  new  crown  that  the  transition  could 
be  effected  without  disturbance  of  the  price  level  or  injustice  to 
either  debtor  or  creditor.  There  was  no  scaling  of  obligations, 
for  the  paper  florin  was  converted  into  gold  at  a  ratio  close  to 
its  average  gold  value  during  the  preceding  ten  years. 

During  the  ten  years  following  1892  the  Austro-Hungarian 
Bank,  aided  by  the  government,  accumulated  some  $200,000,000 
in  gold,  and  the  premium  on  that  metal  gradually  fell  to  a 
fraction  of  i  per  cent.  At  the  present  time  (1905)  the  country 
is  practically  upon  a  gold  basis,  although  the  state  bank  is  not 
under  compulsion  to  redeem  its  notes  in  gold.2 

1  It  was  ordained  in  the  law  that  100  of  the  new  crowns  should  be  equal  to  42 
of  the  old  gold  florins  and  to  50  paper  florins,  a  difference  of  16  per  cent. 

2  In  November,  1903,  the  Austro-Hungarian  Bank  held  $226,000,000  in  gold  and 
$59,000,000  in  silver.    Its  note  circulation  amounted  to  $350,000,000.    See  Monthly 
Summary  of  Commerce  and  Finance,  November,  1903,  p.  1636. 


FIAT   MONEY   IN   FOREIGN   COUNTRIES 


THE  CREDIT  RUBLE  IN  RUSSIA 


295 


199.  Russia  has  just  extricated  its  finances  from  the  chaos 
of  a  century's  experience  with  fluctuating  fiat  money.  Paper 
credit  money  was  first  used  in  Russia  in  1768,  at  which  time 
the  unit  or  standard  was  the  silver  ruble  (divided  into  100 
kopecks),  which  was  exactly  equivalent  to  four  francs.  Excess- 
ive issues  of  paper  rubles  in  1786  caused  their  depreciation, 
and  from  that  date  until  1897,  a  few  years  excepted,  the  mone- 
tary unit  of  Russia,  despite  several  efforts  to  return  to  a  metal 
standard,  was  a  piece  of  government  paper  discredited  and 
unredeemed.  The  volume  of  paper  rubles,  which  were  known 
as  "assignats,"  rose  in  1817  to  800,000,000  ($600,000,000),  and 
paper  with  respect  to  silver  was  at  a  discount  of  75  per  cent. 

In  1839,  by  a  compulsory  conversion  into  new  paper  money 
called  "bills  of  credit,"  at  the  rate  of  three  and  one  half  of  the 
old  paper  for  one  of  the  new,  the  volume  of  paper  money  was 
reduced  and  a  metal  standard  was  almost  achieved.1  The 
Crimean  War  led  to  increased  issues  and  rapid  depreciation. 
Between  1845  and  1857  the  volume  of  paper  increased  from 
170,000,000  to  735,000,000  rubles.  An  unsuccessful  effort  at 
redemption  in  1863,  when  the  paper  ruble  advanced  nearly  to 
par  in  silver,  was  followed  by  another  era  of  inflation  and  depre- 
ciation, until  in  1877  the  paper  was  at  a  discount  of  41  per  cent 
with  respect  to  gold,  French  exchange  being  quoted  at  234 
francs  for  100  rubles,  par  being  400.  Fresh  issues  on  account 
of  the  war  with  Turkey  had  raised  the  total  to  over  1,000,000,- 
ooo  rubles.  The  amount  was  reduced  about  1 50,000,000  rubles 
during  the  next  ten  years.2 

During  all  this  period  the  legal  monetary  unit  was  the  silver 
ruble,  but  after  1873,  when  the  gold  price  of  silver  began  to 

1  The  new  bills  of  credit,  or  "  credit  rubles,"  as  they  are  commonly  called, 
appear  to  have  been  at  par  with  silver  most  of  the  time  between  1840  and  1854. 

2  Following  is  a  translation  of  the  words   on  one  side  of  the  paper  ruble : 
"  Imperial  Credit  Note.    On  presentation  there  will  be  paid  at  the  Exchange  Cash 
room  of  the  Imperial  Bank  one  ruble  (or  more)  in  silver  or  gold."    The  other  side 
contained  a  statement  that  the  notes  were  guaranteed  by  the  whole  property  of 
the  realm  ;  also  this  legal-tender  manifesto  :  "  These  credit  notes  enjoy  the  right 
of  circulation  throughout  the  empire  on  an  equality  with  silver  coin." 


296  MONEY  AND   CURRENCY 

fall,  a  sentiment  gradually  formed  in  Russia  in  favor  of  the 
gold  standard.  In  1876  customs  duties  were  made  payable  in 
gold,  and  a  few  years  later  Russia's  foreign  loans  were  drawn 
in  terms  of  gold.  Nevertheless,  that  there  was  no  definite 
purpose  to  adopt  the  gold  standard  was  shown  by  a  decree  in 
1885  declaring  the  legal  unit  to  be  the  silver  ruble  of  17.996 
grams  of  pure  silver,  and  permitting  the  coinage  of  gold  at  a 
ratio  of  I  to  15.4958. 

200.  After  1887,  owing  to  reduction  in  the  quantity  of  credit 
rubles  and  to  improving  industrial  conditions,  the  value  of  the 
ruble  steadily  rose  until  1890,  when  it  was  worth  72  kopecks  in 
gold  (par  being  100).  Then  it  weakened  and  its  average  gold 
value  in  1892  was  only  63  kopecks.  It  rose  to  65  in  1893  and 
to  67  in  1894.  Meantime  two  significant  events  had  happened. 
In  1893  the  decline  in  the  value  of  silver,  caused  by  the  closing 
of  the  Indian  mints  and  the  repeal  of  the  Sherman  Act  in  the 
United  States,  suddenly  made  the  credit  ruble  worth  more  than 
the  quantity  of  silver  which  it  legally  represented.  The  Rus- 
sian government,  not  desiring  the  silver  standard,  promptly 
closed  its  mints  to  the  coinage  of  silver  rubles  in  July,  1893. 
The  paper  ruble,  which  was  worth  97  kopecks  in  silver  in  1892, 
rose  to  105  in  1893  and  145  in  1894.  The  second  important 
event  was  the  adoption  by  the  government  of  a  policy  intended 
to  prevent  wide  fluctuations  in  the  gold  price  of  the  ruble, 
which  had  risen  from  63  in  1892  to  67  in  1894.  The  govern- 
ment, having  accumulated  a  hoard  of  gold  amounting  in  1894 
to  $450,000,000,  entered  the  markets  as  a  seller  of  foreign 
exchange,  that  is,  of  gold.  In  this  manner  for  three  years  it 
prevented  the  gold  value  of  the  ruble  from  rising  above  67,  thus 
holding  the  ruble  to  a  fixed  relation  with  gold.  This  policy, 
which  was  a  practical  maintenance  of  the  gold  standard,  was 
given  formal  recognition  by  law  in  1897,  the  paper  ruble  being 
made  convertible  into  gold  at  the  rate  of  66|  kopecks  per  ruble. 

In  order  that  the  transition  from  a  fiat  to  the  gold  standard 
might  cause  no  disturbance  of  prices,  the  law  named  as  the 
new  monetary  unit  a  gold  ruble  containing  one  third  less  gold 
than  the  old.  Since  the  paper  ruble  had  for  three  years  been 


FIAT  MONEY   IN   FOREIGN   COUNTRIES          297 

kept  equal  in  value  to  between  66  and  67  kopecks  gold,  it  was 
evidently  at  par  with  the  new  ruble.  Gold  rubles  of  the  old 
coinage,  of  which  some  were  in  existence,  were  made  exchange- 
able for  one  and  a  half  of  the  new.1  This  was  about  the  aver- 
age value  which  the  credit  ruble  had  maintained  in  gold  during 
a  period  of  twenty-five  years. 

The  paper  ruble  was  pure  fiat  money  from  1857  until  1893. 
Legally  and  nominally  it  was  linked  with  silver,  but  actually  its 
value  was  dependent  upon  the  monetary  demand  and  supply. 
After  1887  the  growing  belief  that  it  would  some  day  be  re- 
deemed in  gold  increased  its  acceptability  as  money  and  tended 
to  raise  its  value  ;  but  this  could  not  have  been  a  decisive  factor, 
for  redemption  had  not  been  promised  nor  had  the  probable 
ratio  of  exchange  between  the  paper  and  gold  ruble  been  even 
discussed.  Even  in  1895,  when  the  drawing  of  contracts  pay- 
able in  gold  was  authorized,  it  was  officially  announced  that 
this  step  "  did  not  furnish  any  ground  upon  which  to  predict 
the  adoption  of  a  gold  standard,  or  commit  the  state  to  any 
particular  method  of  redeeming  the  bills  now  outstanding." 

The  establishment  of  the  gold  standard  was  made  possible 
by  the  large  holding  of  gold  accumulated  by  the  Bank  of  Rus- 
sia, a  government  institution.  The  stock  of  gold  in  Russia, 
according  to  estimates  of  the  United  States  Director  of  the 
Mint,  increased  from  $455,000,000  in  1894  to  $756,000,000  in 
1897,  when  the  new  monetary  system  was  legally  adopted. 
Silver  is  now  coined  only  on  government  account  and  is  credit 
money  like  the  silver  coins  of  the  United  States.  Imperial 
credit  notes  (the  old  credit  ruble)  have  been  retired,  the  notes 
of  the  Imperial  Bank  having  taken  their  place. 

FIAT  MONEY  MADE  OF  SILVER 

201.  British  India  has  just  passed  through  a  novel  though 
brief  experience  with  fiat  money.  From  1835  till  1893  India's 
monetary  unit  was  the  rupee  of  165  grains  of  pure  silver. 

1  The  old  gold  ruble  was  equal  to  77  cents  of  our  money ;  the  new  ruble  is 
equal  to  51  cents. 


298  MONEY  AND   CURRENCY 

As  free  coinage  was  permitted,  the  value  of  the  rupee  never 
differed  widely  from  that  of  165  grains  of  silver  bullion.  Hence 
prices  in  India  reflected  variations  in  the  value  of  silver. 

The  fall  in  the  gold  value  of  silver  after  1873,  although  not 
caused  by  any  great  decline  in  its  real  value,  and  so  not  attended 
by  a  great  rise  of  Indian  prices,  was  a  source  of  positive  loss 
to  the  people  of  India  and  of  considerable  embarrassment  to 
the  government.  For  the  development  of  its  resources  India 
had  borrowed  capital  in  England  by  the  sale  of  gold  bonds,  the 
interest  on  which  amounted  to  about  ;£  16,000,000  or  $80,000,- 
ooo  gold.  This  interest  fund  was  raised  by  taxation,  the  rupees 
thus  obtained  being  converted  by  the  government  into  gold  or 
sterling  exchange.  As  the  gold  price  of  silver  fell  in  Europe 
the  silver  price  of  gold  rose  correspondingly  in  India,  so  that 
;£  1 6,000,000  in  gold  represented  increasing  sums  of  Indian 
money.  As  a  result  the  annual  remittance  to  England  absorbed 
a  larger  and  larger  proportion  of  India's  revenues.  It  increased 
from  170,000,000  rupees  in  1873  to  270,000,000  rupees  in 

1892.  To  the  people  of  India  gold  seemed  to  be  a  commodity 
of  rising  value,  and  their  view  was  nearer  the  truth  than  that 
of  the  average  Englishman  or  American,  to  whom  silver  seemed 
to  be  a  depreciating  metal. 

The  depreciation  of  the  rupee  as  measured  in  gold,  besides 
proving  a  burden  to  the  Indian  government,  seriously  inter- 
fered with  India's  trade  and  investment  relations  with  England. 
It  also  caused  much  complaint  from  the  English  civil  officers 
in  India,  whose  salaries,  paid  in  rupees,  were  exchangeable  for 
diminishing  sums  in  pounds  sterling. 

In  order  to  check  the  decline  in  Indian  exchange,  that  is, 
in  the  gold  value  of  the  rupee,  the  government  on  June  26, 

1893,  foreseeing  the  probable  repeal  of  the  Sherman  Act  in 
the  United  States  and  its  depressing  effect  on  the  value  of 
silver,  ordered  that  the  mints  of  India  be  closed  to  the  further 
coinage  of  rupees.    At  the  same  time  notice  was  given  that  the 
government  would  give  rupees  in  exchange  for  sovereigns  at 
the  rate  of  15  rupees  for  a  sovereign  (i  rupee  for  16  pence), 
and  that  public  dues  might  be  paid  in  sovereigns  at  this  rate. 


FIAT  MONEY   IN   FOREIGN   COUNTRIES          299 

As  the  rupee  at  this  time  was  worth  only  about  14  pence  in 
gold,  it  was  evident  that  no  sovereigns  would  be  offered  to  the 
government  for  exchange  into  rupees  at  16  pence  per  rupee. 
It  was  hoped,  however,  that  the  cessation  of  coinage,  since  it 
would  prevent  further  increase  of  the  money  supply,  would 
lead  to  a  rise  in  the  value  of  the  rupee  as  the  monetary  demand 
of  the  country  increased;  and  this  hope,  which  was  based  on 
sound  monetary  principles,  was  realized.  The  bond  uniting  the 
rupee  and  silver  having  been  broken,  their  values  immediately 
moved  in  different  directions  ;  the  gold  price  of  silver  declined 
from  35  pence  in  1893  to  26  pence  in  1898,  while  the  rupee, 
fluctuating  at  first  between  13  and  14  pence,  finally  began  a 
gradual  advance,  until  in  1898  it  reached  the  desired  gold  valua- 
tion of  1 6  pence.  In  September,  1899,  gold  was  declared  full 
legal  tender  at  15  rupees  per  sovereign,  or  16  pence  per  rupee. 
Thus  the  gold  standard  was  introduced,  although  the  govern- 
ment did  not  agree  to  redeem  rupees  in  gold. 

For  the  student  of  money  the  transition  from  silver  to  gold 
monometallism  in  India  illustrates  certain  fundamental  prin- 
ciples with  the  definiteness  of  a  laboratory  experiment.  It 
deserves,  therefore,  careful  examination. 

It  should  be  noted,  in  the  first  place,  that  between  1893  and 
1899  the  rupee  was  fiat  money,  its  value  being  the  product 
solely  of  the  need  for  it  to  serve  as  money.  Prior  to  1893  it 
had  been  commodity  money,  its  value  subject  to  world  forces 
acting  upon  the  demand  for  and  supply  of  silver ;  but  after 
1893  the  rupee  was  independent  of  silver,  for  an  increase  in 
the  supply  of  the  world's  silver  could  not  lead  to  an  increase  in 
the  quantity  of  rupees.  Only  under  two  contingencies  could  the 
value  of  silver  bullion  after  1893  have  impressed  itself  upon 
the  rupee  :  (i)  if  silver  had  risen  in  value  more  rapidly  than 
the  rupee ;  or  (2)  if  the  rupee,  on  account  of  a  decreasing  mone- 
tary demand,  had  fallen  in  value  more  rapidly  than  silver 
bullion.  In  either  event  rupees  would  have  been  melted  into 
bullion  and  their  value  kept  at  par  with  165  grains  of  silver. 

Such  a  change  of  values,  however,  did  not  take  place,  nor 
was  it  to  be  expected.  From  a  business  and  monetary  point  of 


300  MONEY  AND   CURRENCY 

view  India  is  a  developing  country,  each  year  bringing  addi- 
tional needs  for  currency.  Furthermore,  the  national  penchant 
for  hoarding  cuts  into  the  monetary  stock  each  year.  For  these 
two  reasons  —  increase  in  the  demand  and  reduction  of  supply 
—  the  rupee  steadily  rose  in  value  after  its  free  coinage  was 
suspended  in  1893,  and  the  prices  of  goods  in  India  corre- 
spondingly declined.  Meantime  silver  was  depreciating,  the 
large  coinage  demand  from  India  and  from  the  United  States 
having  ceased  in  the  same  year. 

GOLD  NOT  THE  STANDARD  IN  1893 

202.  The  theory  that  gold  became  the  standard  of  India  as 
soon  as  the  free  coinage  of  silver  was  suspended  in  1893,  and 
that  the  silver  rupee  became  a  piece  of  credit  money  deriving 
its  value  from  its  prospects  of  redemption  in  gold,  is  not 
tenable.1  The  government  in  1893  made  no  declaration  as  to 
its  intentions  with  regard  to  the  rupee.  It  announced  that  it 
would  accept  sovereigns  in  payment  of  taxes  at  the  rate  of  15 
rupees  per  sovereign,  but  it  gave  the  public  no  ground  for 
expecting  that  it  would  redeem  the  rupee  in  gold  at  that  rate. 

If  the  events  of  1893  had  given  rise  to  a  belief  that  the 
rupee  would  be  redeemed  in  gold,  and  if  the  rupee  had  derived 
its  value  from  that  hope  or  belief,  it  should  have  at  once  risen 
in  value  with  respect  to  gold.  The  rupee,  however,  was  worth 
less  in  gold  in  1894  and  1895  than  it  was  in  1893  ;  its  average 
exchange  rate  in  1893  was  14.55  pence,  whereas  in  1894  it  was 
13.1  pence;  in  1895,  13.65  pence;  in  1896,  14.45  pence.  On 
the  assumption  that  the  rupee  was  mere  credit  money,  it  is  diffi- 
cult to  account  for  this  decline  in  its  gold  value,  for  during 

1  This  view  has  been  advanced  by  some  writers.  Indeed,  Mr.  W.  W.  Carlile, 
writing  in  the  Economic  Review  for  March,  1901,  holds  that  gold  was  the  real 
standard  of  value  in  India  after  1873.  Such  a  view  would  make  gold  the  real 
standard  of  value  in  China  at  the  present  time.  The  only  possible  ground  for 
Mr.  Carlile's  position  is  the  fact  that  the  prices  of  commodities  imported  from 
Europe  must  have  tended  after  1873  to  follow  the  course  of  gold  prices.  For  that 
matter,  however,  the  prices  of  articles  in  England  which  are  imported  from  silver- 
standard  countries  tend  to  follow  the.  variations  of  prices  in  the  countries  from 
which  they  are  imported,  but  that  fact  does  not  give  England  the  silver  standard. 


FIAT   MONEY   IN    FOREIGN   COUNTRIES 


301 


these  years  there  was  no  lack  of  confidence  in  the  government 
and  no  inflation  of  the  money  supply,  the  coinage  of  rupees 
having  ceased. 

203.  In  order  that  the  reader  may  have  a  clear  view  of  the 
phenomena  of  this  interesting  period  we  give  on  this  page  a 
table  which  presents  the  most  pertinent  statistics.  Columns  I 
and  II  show  the  gold  value  of  the  rupee  and  of  165  grains  of 

THE  INDIAN  RUPEE  AND  ITS  VALUE 


I 

II 

III 

IV 

V 

VI 

VII 

Gold  Value 
of  Rupee 
in  Pence 
(Exchange 

Gold  Value 
165  Grains 
Pure 
Silver 

Gold  Price 
i  oz.  Silver 
(Eng.  Stand- 
ard =  444 

Sauer- 
beck 
Index 

Coinage 
of  Rupees 
(poo  omitted) 

Net  Imports 
of  Gold  in 
Pounds 

Sterling 

Atkinson 
Index 
Number 

Rate) 

grains) 

(ooo  omitted) 

1890 

18.09 

17-74 

47-75 

72 

131,164 

3.954 

I25 

iS9i 

16-73 

16.70 

45-° 

72 

55-539 

1.653 

128 

1892 

14-77 

14.98 

39-75 

68 

126,915 

1,770! 

141 

1893 

14-55 

13.20 

35-5 

68 

48,125 

374 

138 

1894 

13.10 

10-73 

28.9 

63 

638  2 

2,687  i 

131 

1895 

13.64 

II.  10 

30.0 

62 

2,II02 

1,684 

128 

1896 

14-45 

11.50 

31.0 

61 

3,i  56  2 

i,527 

1897 

15-35 

10.25 

27-5 

62 

4,864 

3,272 

1898 

15.98 

10.03 

27.0 

64 

4,179 

4,335 

1899 

16.0 

10.25 

27-5 

68 

13,018 

6,294 

1900 

16.0 

10.40 

28.0 

75 

171.479 

56i 

1901 

16.0 

10.03 

27.0 

49,520 

1,291 

pure  silver  from  1890  to  1901.  The  third  column  gives  the  gold 
value  of  one  ounce  of  silver  (English  standard  444  grains  pure) 
for  the  same  period.  Column  IV  gives  the  Sauerbeck  index  num- 
ber, the  reciprocal  of  which  shows  approximately  the  fluctua- 
tions in  the  value  of  gold  ;  column  V  gives  the  annual  coinage  of 
rupees ;  column  VI,  the  net  imports  of  gold ;  column  VII  gives 
Mr.  Atkinson's  index  number  computed  from  prices  in  India. 


1  Net  exports  of  gold. 

2  Coinage  in  1894-1897  was  mainly  of  half  rupees,  which  were  full  legal  tender. 


302  MONEY  AND   CURRENCY 

The  reader  will  notice  the  following  points:  (i)  that  prior 
to  1893  the  figures  in  the  first  two  columns  are  nearly  identical, 
the  value  of  the  rupee  tending  to  coincide  with  that  of  165 
grains  of  pure  silver;  (2)  that  after  1893  the  gold  value  of  the 
rupee  was  greater  than  the  gold  value  of  165  grains  of  silver; 
(3)  that  the  value  of  gold  between  1893  and  1896  steadily 
increased,  as  shown  by  the  decline  of  the  Sauerbeck  index 
number  from  68  to  61  ;  (4)  that  the  coinage  of  rupees  between 
1893  and  1898  was  hardly  sufficient  to  compensate  for  the 
loss  from  hoarding,  abrasion,  etc.,  so  that  during  this  period 
the  available  stock  of  rupees  probably  decreased;  (5)  that  the 
importation  of  gold  was  uncommonly  large  in  1897,  1898, 
and  1899. 

The  decline  in  the  gold  value  of  the  rupee  after  1893,  at  a 
time  when  the  rupee  itself  should  not  have  been  falling  in 
value,  is  explained  by  reference  to  column  IV,  in  which  gold  is 
shown  to  be  increasing  in  value.  The  decline  in  the  gold  price 
of  the  rupee  resulted  from  the  increase  in  the  value  of  gold. 
If  we  assume  that  the  Sauerbeck  index  number  fairly  reflects 
the  value  of  gold,  we  find  that  the  rupee,  between  1893  and 
1896,  when  its  gold  price  was  declining,  was  really  rising  in 
value  or  purchasing  power.  Continuing  the  comparison,  we 
find  that  the  purchasing  power  or  value  of  the  rupee  began  a 
rapid  upward  movement  in  1894.  This  advance  in  its  real  value 
is  roughly  indicated  by  the  decline  in  the  Atkinson  index  num- 
ber from  138  in  1893  to  128  in  1895. 

PRINCIPLE  OF  BIMETALLISM  ILLUSTRATED 

204.  The  large  influx  of  gold  in  1898  and  1899  illustrates  the 
operation  of  the  principle  of  the  joint  standard  or  bimetallism. 
In  1899  the  government  made  the  sovereign  the  legal-tender 
equivalent  of  1 5  rupees,  and  even  before  that  date  it  had  been 
willing  to  accept  sovereigns  at  this  rate,  which  reckoned  the 
rupee  as  equivalent  to  16  pence.  Evidently  all  debts  to  the 
government  would  be  paid  in  sovereigns  the  moment  the  value 
of  the  rupee  was  a  fraction  above  16  pence.  During  several 


FIAT   MONEY  IN   FOREIGN   COUNTRIES 


303 


months  of  1898  it  rose  above  16  pence,  and  the  importation  of 
gold  accordingly  became  profitable.  In  1899,  when  gold  was 
legal  tender  for  all  payments,  large  quantities  of  it  were  im- 
ported, for  it  was  the  cheaper  medium  of  payment. 

Theoretically  India  still  has  this  double  standard,  the  rupee 
and  the  sovereign,  the  one  fiat  money,  the  other  commodity 
money ;  but  practically,  since  the  government  has  adopted  the 
policy  of  exchanging  gold  for  rupees,  as  well  as  rupees  for  gold, 
the  value  of  the  rupee  is  held  at  16  pence,  and  gold  is  the 
actual  standard. 

After  1893  considerable  fear  was  expressed  in  England  lest 
the  government  of  India  would  not  be  able  to  accumulate  a  gold 
reserve  sufficient  for  the  maintenance  of  the  gold  standard. 
Our  analysis  shows  that  the  situation  itself  necessarily  led  to 
the  automatic  accumulation  of  a  gold  reserve.  The  people  of 
India  have  little  use  for  gold  coins ;  their  favorite  money  is 
the  silver  rupee.  Under  present  conditions  rupees  will  be 
supplied  to  the  people  in  sufficient  quantities  if  the  government 
merely  adheres  to  its  policy  of  giving  1 5  rupees  in  exchange  for 
a  sovereign ;  and  this  process,  on  account  of  the  difference  in 
value  between  the  rupee  and  165  grains  of  silver,  —  a  so-called 
seigniorage,  —  will  result  in  the  gradual  accumulation  of  a  gold 
reserve.  If  rupees  are  coined  only  under  these  conditions,  and 
if  no  bank-note  inflation  is  permitted,  no  run  upon  the  gold 
reserve  is  probable,  for  that  could  result  only  from  an  excessive 
supply  of  currency.  Of  course,  if  the  monetary  need  of  India 
should  suffer  a  great  decline,  as  it  might  on  account  of  depressed 
industries  or  famine,  the  money  supply  would  be  redundant 
and  the  resultant  gold  exports  might  lead  to  an  embarrassing 
call  for  rupee  redemption.  This  contingency,  however,  is  little 
to  be  feared. 

Chart  V,  on  page  305,  gives  the  reader  a  graphic  view  of  the 
value  of  the  rupee  after  1893  as  compared  with  16  pence  gold 
and  165  grains  of  pure  silver.  The  purchasing  power  of  16 
pence  gold  (indicated  by  the  crossed  line)  is  assumed  to  be 
100  in  1892,  and  subsequent  variations  are  calculated  from  the 
Sauerbeck  index  number.  The  value  of  the  rupee  in  1892, 


304  MONEY  AND   CURRENCY 

when  it  was  coequal  with  165  grains  of  silver,  was  equivalent 
to  14.77  pence,  or  9  per  cent  less  than  16  pence ;  on  the  chart, 
therefore,  the  line  indicating  its  value  (black  line)  begins  at  91. 
The  subsequent  variations  in  the  value  of  the  rupee  are  calcu- 
lated by  a  combination  of  the  Sauerbeck  index  number  and  the 
gold  price  of  the  rupee ;  it  is  of  course  only  a  rough  approxi- 
mation, yet  it  coincides  in  general  with  the  movement  indicated 
by  the  Atkinson  index  number  of  Indian  prices.  The  fluctua- 
tions of  Indian  exchange,  i.e.  changes  in  the  gold  price  of  the 
rupee,  are  shown  by  the  chained  line,  reference  being  made  to 
the  figures  at  the  right  of  the  chart.  The  value  of  165  grains 
of  silver  is  shown  by  the  dotted  line  ;  until  1 893  it  was  of 
necessity  practically  coincident  with  the  black  line  showing  the 
value  of  the  rupee. 

The  chart  shows  that  the  rupee  rose  in  value  during  1894 
and  1895,  although  during  these  years  its  gold  price  was  declin- 
ing, and  that  it  reached  parity  with  16  pence  in  1898.  Any 
further  advance  was  impossible,  for  the  reason  that  even  a 
fractional  advance  above  16  pence  caused  a  transference  of  the 
monetary  demand  from  the  rupee  to  gold.  The  fall' in  the  value 
of  silver  after  1893  is  a  striking  illustration  of  the  influence 
which  the  monetary  demand  for  a  metal  exerts  upon  its  value ; 
and  the  whole  experience  of  India  from  1893  to  1899  illustrates 
the  concurrent  use  of  a  double  standard. 

205.  Our  analysis  of  fiat-money  systems  by  no  means  exhausts 
the  material  afforded  by  the  world's  experience.  The  student 
will  find  in  history  numerous  instances  of  fiat  money  originating 
in  the  depreciation  of  credit  money.  Perhaps  the  best-known 
illustrations  are  John  Law's  paper  money  issued  about  1720  in 
France  and  the  assignat  of  the  French  Revolution.1  American 
colonial  history  also  furnishes  instructive  and  interesting  experi- 
ments. But  the  student  need  not  look  to  history  for  illustra- 
tions, for  several  foreign  countries,  notably  Spain  and  Brazil, 
are  upon  a  fiat  basis  at  the  present  time. 

1  Some  details  concerning  the  issue  of  assignats  are  given  in  Section  209  ; 
see  also  A.  D.  White's  Fiat  Money  Inflation  in  France.  Law's  money  is  well 
sketched  in  Nicholson's  Money  and  Monetary  Problems, 


FIAT   MONEY   IN   FOREIGN   COUNTRIES          305 


A 


SKt 


306  MONEY   AND   CURRENCY 

ADVANTAGES  CLAIMED  FOR  FIAT  MONEY 

206.  We  are  now  ready  for  a  consideration  of  certain  theo- 
retical advantages  which  are  claimed  for  fiat  money,  and  for  the 
discussion  of  various  plans  proposed  for  their  realization.  This 
task,  which  now  seems  to  be  of  academic  interest  only,  may  at 
any  time  become  a  live  issue,  for  in  the  United  States  there 
exists  as  an  evil  heritage  of  the  greenback  era  a  latent  antipa- 
thy to  metal  money,  which  any  sudden  emergency,  whether 
born  of  war  or  industrial  depression,  may  convert  into  a  real 
peril. 

Some  theorists  upon  money,  deeply  impressed  by  the  imper- 
fections of  commodity  money,  have  advocated  the  deliberate 
adoption  of  a  fiat  standard.  They  have  called  it  by  various 
names,  such  as  scientific  money,  ideal  money,  absolute  money. 
Stability  of  value,  that  is,  a  uniform  price  level,  is  to  be 
secured  by  artificial  regulation  of  the  supply.  It  is  proposed, 
for  example,  that  a  government  board  of  statisticians  shall  con- 
struct an  official  index  number  of  prices  and  that  the  supply  of 
paper  money  shall  be  inflated  when  this  index  number  tends 
downward,  and  contracted  when  it  tends  upward.  Fiat  money 
issued  under  such  conditions,  it  is  held,  would  be  superior  to 
metal  money  in  three  respects  :  (i)  it  would  be  more  econom- 
ical ;  (2)  its  value  would  be  more  stable  ;  and  (3)  its  supply  could 
not  be  "  cornered." 

If  the  feasibility  of  a  stable  fiat  money  be  granted,  the  first 
advantage  cannot  be  denied.  Gold  and  silver  are  costly  materials 
for  money.  Every  year  large  sums  of  capital  and  the  labor  of 
many  thousand  men  are  devoted  to  the  production  of  these 
metals.  If  they  were  not  used  as  money,  their  value  would  fall, 
smaller  quantities  would  then  be  mined,  and  considerable  labor 
and  capital  would  be  set  free  for  the  creation  of  other  utilities. 
In  other  words,  if  the  world  could  safely  employ  fiat  paper 
money,  its  wealth  would  increase  more  rapidly  than  it  does  at 
present,  for  many  of  the  men  engaged  in  digging  for  gold  and 
silver  could  then  be  employed  in  producing  the  necessaries  and 
comforts  of  life. 


FIAT   MONEY  IN   FOREIGN   COUNTRIES 


307 


If  it  be  granted  that  fiat  paper  money  can  be  maintained  at  a 
stable  value,  then  its  use  would  save  the  business  world  from 
the  alternating  periods  of  fictitious  prosperity  and  unnecessary 
depression  now  caused  by  the  inevitable  fluctuations  of  gold 
and  silver.  Since  no  commodity  would  decline  in  price  except 
as  it  fell  in  value,  one  of  the  causes  of  perplexity  and  failure  in 
the  business  world  would  be  removed.  Money  would  then  be 
a  real  standard  of  value,  for  value  and  price  would  practically 
be  synonymous.  It  cannot  be  denied  that  such  an  ideal  money, 
if  it  were  attainable,  would  possess  great  advantages  over  gold 
and  silver,  for  stability  of  value  is  the  most  desirable  character- 
istic of  money. 

.As  for  the  "cornering"  of  money,  only  among  the  ignorant 
has  there  ever  been  any  fear  of  such  a  feat  being  attempted. 
No  speculator  or  clique  of  speculators  has  ever  tried  to  corner 
the  money  of  a  country.  Such  an  undertaking  would  react  dis- 
astrously upon  the  conspirators.  In  order  to  acquire  a  "con- 
trolling interest  "  in  the  money  supply  they  would  be  compelled 
to  sell  their  own  property  upon  a  descending  scale  of  prices,  so 
that  every  step  they  took  would  result  in  a  tremendous  reduc- 
tion of  their  resources.  The  cornering  of  money  would  prove  a 
Sisyphean  task,  for  each  abstraction  from  the  supply  would  lift 
the  value  of  the  remainder  to  the  level  first  held  by  the  total 
supply.  Wise  speculators  would  not  plan  such  a  coup,  and 
foolish  ones  would  ruin  only  themselves.  Furthermore,  gold 
flows  from  country  to  country  with  the  greatest  possible  free- 
dom, so  that  any  attempt  to  depress  prices  in  a  single  country 
by  the  segregation  of  a  large  quantity  of  gold  would  inevitably 
be  futile. 

DEFECTS  OF  FIAT  MONEY 

207.  Three  strong  objections  must  be  urged  against  a  so- 
called  ideal  money.  In  the  first  place,  it  is  not  clear  how  the 
supply  of  such  money  can  be  effectively  regulated  without  dam- 
age to  business.  The  power  of  artificial  expansion  and  con- 
traction should  be  lodged  only  with  men  who  are  in  touch  with 
business  operations.  The  establishment  of  a  government  bank 


308  MONEY  AND   CURRENCY 

having  branches  in  all  parts  of  the  country,  doing  a  general 
business  in  deposit  and  discount  and  having  power  to  issue  fiat 
money  at  will,  would  seem  to  be  necessary.  Such  a  bank,  by  the 
contraction  of  its  loans  and  discounts,  could  depress  or  inflate 
prices  at  will.  But  within  what  limits  should  fluctuations  be 
confined  ?  Should  a  rise  of  prices  due  to  a  legitimate  expansion 
of  credit  be  summarily  checked  ?  At  a  time  when  conditions 
warrant  industrial  activity  and  a  natural  expansion  of  credit 
would  not  a  curtailment  of  the  money  supply  act  like  a  wet 
blanket  upon  enterprise  and  weaken  the  productive  energy  of 
a  people  ?  How  shall  the  official  statisticians  determine  whether 
a  rise  of  prices  is  due  to  credit  or  to  an  excess  of  money?  The 
idea  of  a  scientific  fiat  money  suggests  numerous  questions  like 
these.  Perhaps  they  can  be  answered,  but  as  yet  they  have  not 
even  been  discussed. 

Granting,  however,  that  a  practicable  scheme  can  be  devised, 
its  adoption  at  the  present  time  or  in  the  near  future  would 
be  attended  by  a  risk  more  than  offsetting  the  accruing  bene- 
fits. There  is  no  nation  on  earth  in  which  the  conditions  exist 
that  are  essential  to  the  stability  of  fiat  money,  for  there  is  no 
nation  in  which  the  nature  of  such  money  and  the  circumstances 
governing  its  value  are  understood  by  the  masses  of  the  people. 
There  could  be  no  confidence  with  regard  to  the  future  value 
of  such  money,  for  there  could  be  no  certainty  that  the  plan  of 
restriction  would  be  adhered  to.  Since  every  expansion  would 
afford  relief  to  the  business  community  and  every  contraction 
would  be  attended  by  financial  stringency,  by  high  rates  of 
interest,  and  by  more  or  less  industrial  strangulation,  the  weight 
of  public  opinion  would  evidently  be  in  favor  of  expansion  and 
opposed  to  contraction.  In  the  United  States,  for  example,  an 
act  of  Congress  providing  for  the  restricted  issue  of  such  money 
might  be  amended  or  even  repealed  by  the  next  Congress. 
Indeed,  the  next  Congress  might  be  composed  of  men  honestly 
convinced  that  the  supply  of  money  was  too  small,  and  that 
if  it  were  doubled  the  nation's  prosperity  would  be  greatly 
increased.  No  one  who  has  followed  the  newspaper  and  maga- 
zine discussion  of  the  money  question  during  the  last  twenty 


FIAT  MONEY   IN   FOREIGN   COUNTRIES          309 

years  can  be  in  doubt  about  the  dangerous  qualities  of  the 
"  isms  "  to  which  this  country  would  be  exposed  were  it  to 
attempt  to  realize  the  dreams  of  the  "  scientific  "  money  theo- 
rists. 

A  third  objection  to  any  form  of  fiat  money  is  found  in  the 
foreign  exchanges.  No  matter  how  stable  the  money  might  be 
in  value,  its  relation  to  the  standards  of  other  countries  would 
be  constantly  fluctuating.  So  long  as  other  countries  continued 
to  use  gold  or  silver  as  their  standard  of  prices,  the  United 
States,  by  the  adoption  of  fiat  money,  would  put  itself  at  a 
disadvantage  in  foreign  commerce.  A  change  in  the  value  of 
gold  or  silver  would  work  artificial  and  mischievous  interference 
with  the  country's  imports  and  exports.  Importers  would  never 
be  certain  of  their  costs  measured  in  the  money  of  this  country, 
and  exporters  would  never  be  sure  of  the  value  of  their  receipts. 
Since  dealers  in  foreign  bills  of  exchange  would  incur  specula- 
tive risks,  merchants  would  be  compelled  to  buy  exchange  at 
prices  high  enough  to  provide,  as  it  were,  an  insurance  fund  to 
cover  these  risks. 

Furthermore,  this  fluctuation  in  the  rates  of  exchange  would 
tend  to  retard  the  development  of  a  country,  for  it  would  dis- 
courage the  investment  of  foreign  capital.  At  a  time  when 
gold  was  rising  in  value  our  fiat  money  would  seem  to  foreigners 
to  be  depreciating,  and  they  would  be  averse  to  sending  their 
capital  here,  just  as  they  shrank  from  investing  in  Mexico  and 
India  while  the  gold  price  of  silver  was  declining.  The  evils 
caused  by  exchange  fluctuations  were  the  real  cause  of  the 
adoption  of  the  gold  standard  by  Russia  and  Austria.  Finan- 
ciers in  those  countries  were  convinced  that  the  funds  needed 
for  internal  development  would  not  be  advanced  by  foreigners 
so  long  as  there  was  uncertainty  about  the  gold  value  of  the 
Russian  ruble  or  the  Austrian  florin.  Events  justified  this 
view.  As  soon  as  the  gold  policy  was  definitely  decided  upon 
by  Russia  and  Austria  foreign  capital  poured  in.  Indeed,  the 
influx  of  foreign  capital  into  Austria  in  1892,  the  date  of  the 
gold-standard  law,  caused  a  boom  in  Austria's  industries  and 
securities  which  came  near  ending  in  panic,  so  quickly  and 


310  MONEY  AND   CURRENCY 

powerfully  had  the  stimulus  been  applied.  Russia  experienced 
similar  effects.  Since  1890  more  foreign  capital  has  found 
employment  in  Russia  in  the  building  of  railroads  and  factories 
than  had  been  invested  in  that  country  during  the  entire  cen- 
tury preceding.  This  sudden  burst  of  prosperity  in  Russia  and 
Austria  is  sometimes  pointed  to  as  evidence  of  the  superior 
qualifications  of  gold  as  a  money  metal.  This  view  is  a  mistake. 
The  industrial  revival  in  Austria  and  Russia  proves  not  that 
gold  is  the  best  money  possible  but  that  any  country  is  at  a 
disadvantage  if  its  monetary  standard  differs  from  that  of  its 
rich  and  prosperous  neighbors. 

PAPER-MONEY  ADVOCATES  IN  THE  UNITED  STATES 

208.  Political  agitators  who  have  clamored  for  paper  money  in 
the  United  States  have  not  had  in  mind  ideal  fiat  money.  They 
want  no  limitation  of  the  supply.  They  hold  that  if  the  vast 
wealth  and  credit  of  the  United  States  were  back  of  paper 
money  there  could  be  no  depreciation,  for  there  could  never 
be  too  much  money.  A  common  proposal  is  that  the  govern- 
ment shall  issue  paper  money  in  such  abundance  that  it  can  be 
advanced  at  a  low  rate  of  interest  to  every  man  who  can  deposit 
as  security  either  farm  produce  or  a  mortgage  on  land.  Since 
money  of  this  kind  would  have  genuine  value  back  of  it,  how, 
asks  the  demagogue,  could  it  depreciate  ?  Would  it  not  always 
be  worth  its  face  value  ?  A  man  who  has  no  grasp  of  the  prin- 
ciples upon  which  the  value  of  money  depends  might  find  it 
difficult  to  answer  these  questions.  Nevertheless  there  cannot 
be  the  slightest  doubt  that  paper  money  freely  issued  and 
loaned  in  this  way  would  rapidly  depreciate. 

Let  us  suppose  that  the  plan  were  adopted  by  Congress  and 
that  paper  money  amounting  to  $2,000,000,000  were  issued 
and  loaned  to  people  depositing  the  proper  security  at  Wash- 
ington. The  result  would  be  a  doubling  of  the  money  supply 
of  the  United  States  without  any  corresponding  increase  in  the 
volume  of  wealth  to  be  exchanged.  Since  double  the  old 
amount  of  money  would  be  offered  for  goods,  prices  would  be 


FIAT   MONEY   IN   FOREIGN   COUNTRIES          311 

lifted  ioo  per  cent  and  all  gold  would  be  exported  or  withdrawn 
from  circulation.  A  farmer  who  had  been  worth  $10,000  would 
before  long  be  worth  $20,000.  Each  of  the  borrowers  could  go 
to  the  government  and,  by  showing  the  increased  "value" 
of  his  property,  could  double  his  loan,  thus  adding  another 
$2,000,000,000  to  the  money  of  the  country  and  causing  another 
lift  of  prices.  The  farmer  originally  worth  $10,000  would 
become  worth  $30,000,  and  would  have  security  for  a  loan 
three  times  as  large  as  in  the  beginning.  So  with  every  increase 
of  the  money  supply  prices  would  rise  and  the  power  to  borrow 
money  would  increase.  This  might  go  on  ad  infinitum.  Many 
people  would  think  they  were  getting  rich  because  the  money 
value  of  their  possessions  was  increasing,  but  it  must  be  evi- 
dent to  the  reader  that  a  rise  of  prices  caused  in  this  manner 
would  indicate  no  increase  whatever  in  the  real  value  of  goods. 
Men  would  be  no  better  off  on  account  of  their  greater  supply 
of  money,  for  the  purchasing  power  of  each  dollar  would  be 
steadily  on  the  decline.  The  adoption  of  such  a  plan  would 
necessarily  lead  to  wild  speculation  and  a  general  suspension 
of  industrial  operations. 

FRENCH  EXPERIENCE  WITH  THE  ASSIGNAT 

209.  The  foregoing  hypothetical  description,  exaggerated 
though  it  may  seem,  is  paralleled  by  the  experience  of  France 
with  fiat  money  after  the  revolution  in  1789.  The  new  republic 
was  poor  in  specie  but  rich  in  real  estate  confiscated  from  the 
church.  These  church  lands  were  made  the  basis  for  an  issue 
of  paper  money  known  as  the  "  assignat."  Nominally  these  assi- 
gnats  were  credit  instruments  —  promises  to  pay  coin  —  and 
were  secured  by  pledge  of  the  lands  of  the  republic.  They  con- 
stituted, so  to  speak,  a  general  mortgage  upon  the  property  of 
the  republic,  and  were  convertible  into  land  at  the  option  of 
the  holder.  Although  they  were  not  redeemable  in  coin  they 
seemed  abundantly  secured,  and  many  people  were  unable  to 
understand  why  specie  should  command  a  premium.  As  fresh 
issues  of  the  assignats  were  put  forth,  however,  the  premium 


312  MONEY  AND   CURRENCY 

on  gold  and  silver  steadily  rose,  and  great  popular  indignation 
was  manifested  against  the  bullion  dealers,  who  were  believed 
to  be  discriminating  with  no  good  reason  against  the  assignat. 
Men  who  offered  their  goods  at  two  prices  —  a  high  price  for 
paper  money,  a  low  price  for  specie  —  were  denounced  as  ene- 
mies of  the  republic.  The  Assembly  even  declared  it  illegal  for 
a  seller  to  make  any  distinction  between  assignats  and  specie. 
Nevertheless  the  assignat  steadily  declined  in  value  and  gold 
and  silver  entirely  disappeared  from  circulation.  From  about 
2,000,000,000  fr.  in  1793  the  issues  increased  in  1796  to  45,- 
000,000,000  fr.  (about  $9,000,000,000).  Prices  rose  to  dazzling 
heights.  The  masses  for  a  time  thought  that  their  dreams  of 
wealth  were  being  realized.  A  Parisian  laundress  after  empty- 
ing her  basket  of  fresh  linen  at  the  house  of  a  customer  went 
home  with  it  full  of  paper  money. 

In  1796  the  assignats  were  made  convertible  at  a  great  dis- 
count into  mandats,  a  new  kind  of  paper  money  which  was  also 
exchangeable  for  land.  The  mandats,  although  their  quantity 
was  not  large,  possessed  little  value,  the  people  having  lost  all 
confidence  in  money  of  that  kind. 

Since  the  assignat  and  the  mandat  were  a  lien  upon  real 
estate,  why  should  they  have  depreciated  ?  The  security  pos- 
sessed ample  value  and  the  government  freely  permitted 
conversion  of  paper  money  into  land.  They  depreciated,  never- 
theless, because  the  price  at  which  land  was  convertible  kept 
rising  constantly,  so  that  the  land  value  of  the  assignat 
steadily  declined.  The  assignat  was  not  a  mortgage  upon  any 
particular  piece  of  real  estate  ;  it  was  a  mortgage  upon  property 
in  general.  In  pledging  the  property  of  the  republic  as  security 
the  government  could  do  no  more  than  agree  to  accept  the 
assignat  in  payment  for  this  land.  Evidently  steady  value 
could  not  be  given  to  it  by  such  an  agreement  unless  the  prices 
at  which  the  land  would  be  sold  were  fixed  in  the  beginning  for 
all  time.  Its  value  was  due  entirely  to  its  services  as  money, 
and  necessarily  declined  as  the  quantity  was  increased.  Such 
must  be  the  fate  of  any  kind  of  money  based  upon  property 
unless  the  supply  is  strictly  limited. 


FIAT   MONEY   IN   FOREIGN   COUNTRIES          313 

210.  Even  though  we  grant  the  theoretical  advantages  of 
fiat  money  and  leave  open  the  question  of  its  practicability,  we 
could  not  favor  its  adoption,  for  under  present  conditions  or 
any  likely  to  exist  for  many  years  to  come  fiat  money  would 
lack  the  important  element  of  permanence,  would  hamper  inter- 
national trade,  and  would  make  the  country  adopting  it  an  alien 
in  the  loan  markets  of  the  world.  However  scientific  its  incep- 
tion might  be,  fiat  money  could  have  no  firmer  base  than  the 
caprice  of  a  single  generation.  The  advocates  of  "  ideal  "  money 
fail  to  see  that  it  presupposes  an  ideal  community.  They  fail, 
furthermore,  like  the  advocates  of  volapiik  and  spelling  reform, 
to  recognize  the  fact  that  certain  human  institutions,  of  which 
money  and  language  are  conspicuous  illustrations,  are  the  prod- 
uct of  a  long  evolutionary  process  in  which  the  reason  of  man 
has  played  little  part.  The  phonetic  and  linguistic  idealists, 
although  their  arguments  are  unanswerable,  make  no  impact 
on  the  vernacular  or  its  orthography  ;  but  they  do  no  harm. 
Unfortunately  the  arguments  of  money  idealists  are  not  equally 
futile  or  harmless.  To  the  ignorant  man  money  is  the  myste- 
rious symbol  of  universal  wealth,  and  he  is  easily  fascinated  by 
any  scheme  which  promises  him  a  larger  supply.  The  fact  that 
ideal  money  can  be  made  by  a  printing  press  appeals  to  him 
strongly.  When  theorists  tell  him  that  such  money  is  better 
than  gold  or  silver,  and  politicians  assure  him  that  his  wages 
will  be  advanced,  his  vote  is  won.  Votes  won  in  this  fashion 
—  an  ever-present  peril  in  a  democracy  —  would  open  not  the 
portals  of  Utopia  but  the  flood  gates  of  financial  chaos. 


LITERATURE 

The  "  Restriction  Period  "  in  England,  when  bank  notes  became  fiat 
money,  is  described  in  the  following  :  W.  G.  SUMNER,  History  of  Ameri- 
can Currency  (New  York,  1878);  C.  A.  CONANT,  Modern  Banks  of  Issue ; 
H.  D.  MACLEOD,  History  of  Banking  in  England  (published  by  the 
Journal  of  Commerce,  New  York). 

Readers  not  familiar  with  German  or  French  can  get  data  about  Austrian 
and  Russian  paper  money  from  the  following :  The  History  of  Banking  in 
All  Nations  (published  by  the  Journal  of  Commerce,  New  York);  reports 


314  MONEY  AND   CURRENCY 

of  the  United  States  Director  of  the  Mint,  especially  for  the  years  follow- 
ing 1892  ;  C.  A.  CONANT,  Modern  Banks  of  Issue.  See  also  Money  and 
Prices  in  Foreign  Countries  (publication  of  the  State  Department,  Wash- 
ington). A  good  account  of  the  Russian  monetary  reform  is  given  in  the 
Report  of  the  Director  of  the  Mint  for  1898,  and  additional  information  in 
the  reports  for  1896  and  1899. 

Concerning  India,  the  reader  must  rely  on  articles  in  economic  period- 
icals (especially  the  London  Economic  Review,  the  Journal  of  the  Royal 
Statistical  Society,  and  the  London  Economic  Journal"}  and  in  government 
publications.  F.  J.  ATKINSON'S  index  number  of  Indian  prices  is  given  in 
the  Journal  of  the  Royal  Statistical  Society,  March,  1897. 

Other  references  :  ANDREW  D.  WHITE,  Fiat  Money  Inflation  in  France; 
JOHN  Low,  Money  and  Trade  (Glasgow,  1750);  J.  HARVEY,  Paper  Money 
the  Money  of  Civilization  (London,  1877);  A.  M.  DAVIS,  Currency  and 
Banking  in  the  Province  of  Massachusetts  Bay  (New  York,  1900—1901); 
Cheap  Money  Experiments  in  Past  and  Present  Times  (reprinted  from 
Century  Magazine,  New  York,  1892)  ;  J.  PHIN,  Common  Sense  Currency; 
N.  G.  PIERSON,  Economics,  Part  II. 


CHAPTER  XV 

CREDIT   MONEY 

211.  The  value  of  credit  money  depends  upon  the  value  of  money  and  not  at 
all  upon  the  value  of  the  material  out  of  which  it  is  made.  212.  An  increase  of 
the  supply  of  credit  money  tends  to  lower  the  value  of  money  within  a  country. 
213.  The  arbitrary  issue  of  credit  money  in  a  gold-standard  country  tends  to  cause 
an  exportation  of  gold  and  to  lower  the  value  of  gold  in  all  countries.  214.  Con- 
vertible credit  money  does  not  depreciate  by  an  amount  exceeding  the  expense  of 
redemption.  215.  Inconvertible  credit  money  depreciates  when  there  is  doubt 
about  its  future  purchasing  power  or  when  its  supply  is  excessive.  216.  Credit 
money  economizes  the  use  of  money,  and  when  properly  issued  it  makes  the  cur- 
rency elastic.  217.  Elasticity  of  the  currency  prevents  abnormal  changes  in 
prices  and  the  rate  of  interest.  218.  Credit  alone  can  render  the  currency  elastic. 
219.  An  elastic  element  in  the  currency  reduces  to  a  minimum  the  importation 
and  exportation  of  gold.  220.  Credit  money  is  now  issued  by  governments  and 
by  banks.  221.  Two  serious  defects  of  government  credit  money:  (a)  inelasticity ; 
(If)  difficulties  of  redemption.  222.  The  issue  of  government  credit  money  is 
attended  by  a  risk  psychological  in  its  nature.  223.  It  is  impossible  to  fix  a  safety 
limit  of  issue.  224.  Why  inconvertible  government  credit  money  does  not  depre- 
ciate. 225.  Should  credit  money  be  a  legal  tender?  226.  The  bank  note,  if  issued 
under  proper  conditions,  is  ideal  credit  money.  Points  of  resemblance  between 
the  bank  note  and  a  bank  deposit.  227.  A  consideration  of  the  legal  restrictions 
placed  upon  the  issue  of  bank  notes.  228.  Various  plans  to  secure  the  converti- 
bility of  bank  notes.  229.  The  currency  school  and  the  banking  school.  230.  Re- 
demption should  be  as  easy  and  as  certain  as  issue.  231.  The  question  of  banking 
reform  in  the  United  States. 

211.  Any  promise  to  pay  money  which  all  the  people  of  a 
country  are  willing  to  accept  in  lieu  of  money  is  called  credit 
or  representative  money.  Some  forms  of  credit  money  are 
made  legal  tender  by  law  and  some  are  not.  Credit  money 
must  be  a  form  of  credit  payable  on  demand,  and  should  not 
bear  interest,  for  the  accrued  interest  would  give  it  a  different 
value  from  day  to  day.  The  promisor  in  case  of  credit  money 
must  be  a  person  or  institution  in  whom  all  people  have  confi- 
dence, otherwise  it  would  not  be  universally  acceptable  as  a 
means  of  payment. 

Credit  money  is  designated  "token  money  "  by  some  writers. 
This  expression,  however,  is  commonly  restricted  to  credit 

315 


316  MONEY  AND   CURRENCY 

money  of  small  denominations,  which  possesses  limited  or  no 
legal-tender  quality.  It  was  first  applied  in  England  to  small 
coins  issued  by  private  persons  without  authority  of  the  govern- 
ment. In  the  United  States  token  money  includes  the  so-called 
subsidiary  coins,  namely,  pennies,  nickels,  silver  half  dollars, 
quarters,  and  dimes. 

The  value  of  credit  money,  as  of  any  credit  instrument, 
depends  upon  the  value  of  the  thing  promised,  that  is,  upon 
the  value  of  money  itself.  The  value  of  credit  money  rises 
when  the  value  of  money  rises.  It  cannot  be  said  to  have  value 
in  itself  any  more  than  the  image  in  a  mirror  can  be  said  to 
have  substance.  As  the  mirror  reflects  what  is  before  it,  so 
credit  money  reflects  or  represents  the  value  of  real  money. 
Since  credit  money  is  popularly  called  money,  the  latter  by  way 
of  distinction  is  often  styled  standard  money.  Standard  money 
may  be  either  commodity  or  fiat  money,  and  credit  money  may 
be  a  promise  to  pay  either  of  these. 

The  value  of  credit  money  hinges  in  no  way  upon  that  of  the 
material  out  of  which  it  is  made.  In  this  respect  it  is  like  fiat 
money,  but  that  is  their  only  point  of  resemblance.  Fiat  money 
gets  its  value  altogether  from  its  possession  of  money  utilities, 
from  the  demand  for  and  supply  of  money ;  whereas  credit 
money  has  only  a  borrowed  or  reflected  value  varying  with  that 
of  the  money  which  it  promises  to  pay. 

212.  The  use  of  credit  money  tends  to  lessen  the  value  of 
money  and  so  causes  prices  to  be  higher  than  they  would  be  if 
it  were  not  used.  This  proposition  is  true  with  regard  to  all 
forms  of  credit.  As  was  shown  in  Chapter  IV,  credit  is  to  be 
regarded  as  a  circumstance  lessening  the  demand  for  money  and 
having  the  same  effect  upon  prices  as  an  increase  in  the  supply 
of  money.  While  credit  money  constitutes  no  exception  to  this 
general  rule,  its  close  resemblance  to  money  makes  some  further 
analysis  necessary. 

Since  credit  money  is  a  universally  acceptable  medium  of 
exchange,  any  increase  in  its  supply  without  a  corresponding 
growth  in  the  demand  for  money  immediately  tends  to  lower 
the  purchasing  power  of  money  by  causing  prices  to  rise.  While 


CREDIT  MONEY  317 

credit,  as  has  been  shown,  should  properly  be  regarded  not  as 
a  substitute  for  money  but  rather  as  a  device  for  increasing 
the  efficiency  of  money,  nevertheless  credit  money  within  a 
country  does  come  very  near  being  a  complete  substitute,  for 
as  a  medium  of  exchange  it  is  capable  of  doing  all  that  money 
itself  does.  So  any  increase  in  its  supply,  as  far  as  the  people 
are  concerned,  is  practically  the  same  as  an  increase  in  the 
supply  of  standard  money  and  the  first  effect  upon  prices  is 
the  same. 

213.  When  several  countries  use  the  same  metal  as  money, 
gold  for  example,  an  increase  in  the  supply  of  credit  money  in 
any  one  of  these  countries  must  tend  to  affect  prices  in  all,  for 
it  will  tend  to  lessen  the  value  of  gold.  Since  credit  money  is 
acceptable  only  within  the  country  of  its  issue,  it  can  evidently 
have  no  direct  effect  upon  prices  in  other  countries,  for  it  will 
in  no  way  increase  the  apparent  purchasing  power  of  people  in 
these  countries.  It  will,  however,  render  unnecessary  a  certain 
amount  of  gold  within  the  country  in  which  it  is  issued,  and  that 
gold  will  be  exported,  increasing  the  supply  in  other  countries 
and  so  tending  to  lift  prices  there. 

This  exportation  of  gold  will  take  place  automatically  as  a 
result  of  differences  in  price  levels  and  discount  rates.  No 
nation  ever  thinks  it  has  too  much  money  and  none  ever 
exports  gold  with  the  conscious  intention  of  reducing  its  money 
supply.  The  movement  is  always  automatic.  The  issue  of 
credit  money  in  any  country  causes  prices  to  rise  above  the 
level  prevailing  elsewhere.  It  thus  becomes  a  good  market  for 
sellers  but  a  poor  one  for  buyers.  As  a  result  its  exports 
tend  to  decrease  and  its  imports  to  increase.  In  this  way  a 
so-called  balance  of  trade  is  brought  about  and  an  exportation 
of  gold  made  necessary.  Assuming  that  the  demand  for  money 
has  undergone  no  change  whatever  in  any  of  the  countries  con- 
cerned, this  exportation  of  gold  would  equal  the  amount  of 
credit  money  which  had  been  issued  less  the  small  percentage 
of  additional  currency  made  necessary  by  the  higher  prices. 
The  conditions  here  assumed  of  course  never  exist,  for  the 
money  demand  is  subject  to  constant  fluctuations ;  yet  it  is 


3i8  MONEY  AND   CURRENCY 

perfectly  true  that  an  issue  of  credit  money,  unless  made  in 
response  to  a  greater  demand,  always  tends  to  expel  an  approx- 
imately equivalent  amount  of  gold  from  circulation.  Likewise, 
if  a  country  using  silver  as  money  makes  an  arbitrary  increase 
of  its  supply  of  credit  money,  such  increase  will  tend  to  cause 
the  exportation  of  a  nearly  equal  amount  of  silver. 

The  exportation  of  gold  caused  by  an  issue  of  credit  money 
is  sometimes  incorrectly  referred  to  as  an  application  of 
Gresham's  law.  This  law  as  originally  formulated  relates 
only  to  coins  of  the  same  metal  the  weights  of  which  differ  on 
account  of  clipping  and  abrasion.  When  the  money  supply  of 
a  country  consists  of  gold  coins,  if  any  occasion  arises  for  the 
exportation  of  these  coins,  the  heavier  will  always  be  selected  by 
the  exporter,  for  these  will  have  a  higher  bullion  value  abroad, 
whereas  at  home  they  are  worth  no  more  as  money  than  the 
worn  and  clipped  coins. 

CONVERTIBLE  CREDIT  MONEY 

214.  Credit  money  is  called  convertible  when  it  is  redeemed 
on  demand,  and  inconvertible  when  not  so  redeemed.  Under 
certain  conditions  both  convertible  and  inconvertible  credit 
money  circulate  at  par  with  the  money  they  represent ;  under 
other  conditions  both  tend  to  depreciate. 

Convertible  credit  money  so  long  as  its  convertibility  is 
maintained  will  not  depreciate  by  an  amount  exceeding  the 
expense  of  redemption.  If  it  is  issued  in  excess  of  the  monetary 
demand,  a  stimulus  is  given  to  prices,  an  export  demand  for 
gold  is  created,  and  credit  money  is  presented  for  redemption 
"by  persons  desiring  gold.  If  the  expense  of  redemption  amounts 
to  2  per  cent,  then  the  credit  money  will  be  at  a  discount  of 
2  per  cent,  but  that  will  be  the  limit  of  its  depreciation.  The 
result  would  be  the  same  even  in  a  country  which  had  no 
foreign  trade  relations.  In  such  an  isolated  country  an  artifi- 
cial increase  of  the  supply  of  convertible  credit  money  would 
tend  to  raise  prices,  but  such  tendency  would  be  almost  instantly 
checked  by  the  desire  of  people,  especially  bankers,  to  obtain 


CREDIT  MONEY  319 

the  gold  which  the  credit  money  represented.  At  a  given  level 
of  prices  a  certain  amount  of  hand-to-hand  money  is  needed  ; 
if  the  amount  in  circulation  is  increased  arbitrarily  by  an  issue 
of  credit  money  exceeding  the  demand,  the  excess  quickly 
finds  its  way  into  the  banks  and  is  by  them  sent  home  for 
redemption. 

When  convertible  credit  money  is  legal  tender,  larger  quanti- 
ties of  it  may  be  kept  in  circulation  than  when  it  is  not  legal 
tender,  for  it  may  then  be  counted  in  the  reserves  of  banks. 
An  artificial  increase  in  the  supply  of  legal-tender  credit  money, 
by  causing  an  upward  tendency  of  prices,  will  usually  lead  to 
an  exportation  of  gold  or  to  its  larger  use, in  the  arts,  the  new 
credit  money  permanently  displacing  it  in  banking  reserves. 
The  issue  of  such  credit  money,  if  it  is  to  remain  convertible, 
must  evidently  cease  before  all  the  gold  has  been  withdrawn 
from  the  monetary  stock. 

The  effect  of  an  artificial  issue  of  legal-tender  convertible 
credit  money  was  forcibly  illustrated  in  the  United  States 
between  1890  and  1893,  when  new  United  States  notes  to  the 
amount  of  $  1 5  5,000,000  were  issued  in  payment  for  silver  bul- 
lion purchased  under  the  law  of  1890.  These  so-called  Treasury 
notes  of  1890  were  legal  tender  and  were  redeemable  in  gold1 
on  demand.  Their  issue  inflated  the  currency  and  caused  a 
large  exportation  of  gold.  The  government's  credit  money  did 
not  depreciate,  for  redemption  was  maintained. 

CAUSES  OF  DEPRECIATION 

215.  Inconvertible  credit  money  may  depreciate  because  its 
supply  is  excessive  or  because  its  future  purchasing  power  is  in 
doubt.  The  extreme  limit  to  which. such  currency,  if  legal 
tender,  might  be  issued  under  the  most  favoring  conditions 
conceivable  would  be  the  amount  of  money  that  would  be  in 
use  were  no  credit  money  in  existence.  For  instance,  suppose 
that  a  country  having  no  kind  of  credit  currency  is  using  a 

1  Technically  they  were  redeemable  in  "  coin,"  but  this  was  interpreted  as  mean- 
ing gold. 


320  MONEY  AND  CURRENCY 

billion  dollars  of  gold  as  money.  If  the  people  have  absolute 
confidence  in  their  government,  it  is  conceivable  that  a  billion 
dollars  credit  money  might  be  issued  without  any  depreciation 
or  rise  of  prices.  A  credit  dollar  would  merely  take  the  place 
of  each  real  dollar,  but  any  further  issue  of  credit  money 
would  necessarily  cause  depreciation  and  a  rise  of  prices. 

Practically,  however,  depreciation  would  begin  before  the' 
limit  theoretically  possible  had  been  reached,  for  long  before 
all  the  gold  had  been  expelled  from  circulation  doubt  would 
arise  about  the  future  value  or  purchasing  power  of  the  credit 
money.  Credit  currency  begins  to  lose  acceptability  as  a 
medium  of  exchange  the  moment  people  begin  to  fear  it  may 
decline  in  value.  The  supply  may  not  be  excessive  and  the 
question  of  ultimate  redemption  may  not  be  raised ;  it  is  enough 
if  the  people  fear  that  the  credit  dollar  will  not  to-morrow  buy 
a  dollar's  worth  of  goods.  For  a  time  the  monetary  situation 
in  such  a  country  would  be  abnormal.  Some  exchanges  would 
doubtless  be  made  with  gold  and  some  with  the  depreciated 
credit  money.  Under  such  conditions  business  operations  in 
general  would  be  greatly  reduced.  There  would  not  be  gold 
enough  in  the  country  to  carry  on  the  usual  business  exclusively 
in  gold,  nor  enough  credit  money  to  satisfy  the  whole  of  the 
old  demand  for  money.  As  in  the  early  days  of  our  Civil  War, 
men  would  be  at  a  loss  what  price  to  ask  for  their  goods  and  a 
financial  and  industrial  panic  would  doubtless  result.  After  the 
panic  one  of  two  things  would  probably  happen  :  Either  the 
people  would  regain  confidence  in  the  credit  money  and  resume 
its  use  on  a  par  with  gold,  or  the  government  might  increase  its 
supply,  force  its  use  upon  the  people,  and  drive  all  the  gold  out 
of  the  country,  as  Russia  did  after  the  Crimean  War.  Depreci- 
ated credit  money  so  forced  into  circulation  becomes  fiat  money. 

In  the  United  States  the  silver  dollar  is  a  good  illustration 
of  inconvertible  credit  money.  It  circulates  at  par  with  gold 
because  of  limitation  of  the  supply  and  because  of  popular 
confidence  in  the  government.  Redemption  of  the  silver  dollar 
in  gold  is  not  guaranteed,  yet  the  average  creditor,  if  offered 
his  choice  between  a  gold  coin  and  a  silver  certificate,  will  take 


CREDIT   MONEY  321 

the  paper.  But  this  confidence  in  the  future  value  of  the  silver 
certificate  would  quickly  disappear  if  Congress  should  manifest 
a  disposition  to  purchase  more  silver  or  issue  fresh  supplies  of 
credit  currency. 

216.  Credit  money,  when  properly  issued,  serves  two  useful 
purposes:  (i)  it  economizes  the  use  of  money;  (2)  it  makes 
the  supply  of  currency  elastic. 

The  first  service  needs  little  comment.  Gold,  which  is  the 
money  of  the  civilized  world  to-day,  is  a  most  valuable  com- 
modity, produced  only  by  an  outlay  of  much  labor  and  capital. 
Its  use  as  hand-to-hand  money  is  attended  with  considerable 
loss  from  abrasion.  In  large  transactions  it  is  less  convenient 
than  paper  credit  money.  Less  gold  being  needed  when  credit 
money  is  in  existence,  its  value  is  lower  and  less  is  mined,  so 
that  more  of  man's  energy  may  be  devoted  to  the  satisfaction 
of  other  wants.  These  considerations  alone  justify  the  exist- 
ence of  a  certain  volume  of  credit  money. 

The  second  service  is  by  far  the  more  important.  As  was 
pointed  out  in  Chapter  III,  an  ideal  credit  system  is  one  in 
which  the  supply  of  credit  automatically  adjusts  itself  to  varia- 
tions in  the  need  for  a  medium  of  exchange.  If  the  volume  of 
business  is  growing  and  the  conditions  are  such  as  give  rise  to 
an  increased  need  for  the  use  of  checks,  drafts,  and  bills  of 
exchange,  then  there  should  be  no  artificial  restriction  upon  the 
creation  of  credit  instruments  possessing  limited  acceptability, 
each  man  being  left  free  to  judge  whom  he  can  safely  trust. 
Then  business  will  move  smoothly  and  prices  will  not  suffer 
from  a  scarcity  of  exchange  media.  On  the  other  hand,  when 
the  growing  volume  of  business  is  of  a  kind  calling  for  more 
hand-to-hand  money,  then  the  power  to  write  checks  and  drafts 
is  unavailing,  and  an  increase  in  the  supply  of  credit  of  un- 
limited acceptability,  i.e.  credit  money,  is  necessary  to  prevent 
financial  stringency  and  depression.  A  credit  system  which 
does  not  under  such  circumstances  provide  for  the  issue  of 
more  credit  money  as  it  is  needed,  and  for  its  automatic  with- 
drawal from  circulation  when  the  extraordinary  need  is  over,  is 
seriously  defective. 


322  MONEY  AND   CURRENCY 

To  English  readers  the  importance  of  this  point  can  hardly 
be  exaggerated,  for  the  credit  systems  of  both  England  and  the 
United  States  are  in  this  respect  defective.  A  complete  dis- 
cussion of  the  subject,  reinforced  by  the  facts  of  experience, 
belongs  to  a  book  on  credit  and  banking.  In  this  chapter  we 
can  do  little  more  than  state  the  general  principles. 

ELASTICITY  OF  THE  CURRENCY 

.217.  An  elastic  credit  element  in  the  supply  of  currency  is 
important  for  two  reasons  :  (i)  because  an  excess  or  scarcity 
of  cash  abnormally  affects  prices  and  the  rate  of  interest ; 
(2)  because  the  supply  of  money  (gold)  cannot  be  increased  or 
diminished  except  slowly  and  after  business  interests  have 
suffered. 

The  reader  who  understands  the  exposition  given  in  Chap- 
ter V  of  the  laws  governing  the  international  movements  of 
currency  will  need  no  extended  discussion  of  these  two  points. 
At  present,  when  the  United  States  as  a  whole  needs  more 
cash  it  can  be  obtained  only  by  an  importation  of  gold ;  but 
before  it  becomes  profitable  to  import  gold  the  prices  of 
American  goods  and  securities  must  be  lowered  until  foreigners 
are  induced  to  increase  their  purchases,  and  usually  our  rate  of 
discount  must  be  raised  until  the  holders  of  gold  in  Europe 
are  tempted  to  increase  their  investments  in  the  United  States. 
This  means  that  in  order  to  enlarge  the  volume  of  our  currency 
we  are  forced  to  sell  goods  at  a  sacrifice  and  to  hire  capital  at 
an  exorbitant  rate.  The  reader  must  bear  in  mind  that  this 
whole  process  takes  place  automatically,  no  man  engaged  in  it 
being  conscious  of  the  part  he  plays. 

In  like  manner,  since  our  supply  of  domestic  currency  is 
rigid,  movements  of  cash  from  one  part  of  the  United  States 
to  another  are  usually  the  result  of  distress  already  felt  in  the 
place  to  which  it  goes  and  the  cause  of  distress  in  the  place 
from  which  it  is  taken.  In  the  autumn,  for  instance,  the  West 
and  the  South  are  exchanging  their  agricultural  products,  and 
the  sellers  want  cash,  not  checks  and  drafts.  The  eastern  cities 


CREDIT   MONEY  323 

cannot  escape  the  consequences.  Western  and  southern  banks, 
in  order  to  keep  their  reserves  unimpaired,  are  obliged  to  con- 
tract their  loans  and  draw  on  their  deposits  in  eastern  banks. 
As  a  result,  currency  flows  from  New  York  to  the  West  and  the 
South,  —  sometimes  $100,000,000  in  amount,  —  discount  rates 
rise  in  New  York,  prices  weaken,  and  gold  is  imported.  In  the 
winter,  the  special  need  for  cash  in  agricultural  sections  being 
past,  a  reversal  of  the  process  begins.  Currency  is  shipped 
back  to  New  York,  and  the  gold  which  had  been  wrested  from 
Europe  at  great  cost  in  October  and  November  is  exported  in 
March  and  April. 

These  fluctuations  of  prices  and  interest  rates  are  not  an 
insignificant  matter.  They  mean  positive  loss  to  the  country, 
unnecessarily  high  rates  of  interest  to  the  manufacturer  and 
merchant,  and  unnaturally  low  prices  to  the  farmer  and  planter. 

218.  Credit  alone,   in  the  form  of  credit  money,  can  sup- 
ply the  elastic  element  which  is  needed  in  the  currency  of  a 
country,  and  this  is  the  most  important  service  which  credit 
money  can  perform.    When  properly  issued  it  should  not  cause 
prices  to  rise ;  it  simply  should  prevent  a  fall  of  prices,  for  it 
should  be  put  forth  only  in  response  to  a  growing  need  for 
currency  and  to  an  amount  not  exceeding  the  increase  in  the 
demand.    And  when  withdrawn  from  circulation  it  should  not 
cause  a  fall  of  prices,  for  the  amount  taken  away  should  corre- 
spond with  the  reduction  in  the  need  for  currency.    Such  is  the 
service  to  be  performed  by  ideal  credit  money,  and  it  is  one 
that  can  be  performed  by  no  other  instrument  or  device. 

It  has  sometimes  been  argued  that  an  elastic  credit  money  is 
not  needed,  on  the  ground  that  sufficient  elasticity  is  furnished 
by  so-called  deposit  currency,  i.e.  by  checks  and  drafts.  Those 
who  take  this  position  do  not  understand  the  problem.  An 
increasing  need  for  hand-to-hand  money  cannot  be  met  by  the 
writing  of  more  checks  and  drafts.  What  is  wanted  is  more 
cash,  and  that  can  be  supplied  quickly  and  without  cost  only  by 
credit  of  general  acceptability,  i.e.  credit  money. 

219.  An  indirect  benefit  of  ideal  credit  money  remains  to  be 
noted,  namely,  that  it  will  reduce  to  a  minimum  the  importation 


324  MONEY  AND  CURRENCY 

and  exportation  of  gold.  Readers  of  English  and  American 
newspapers  know  how  business  interests  are  disturbed  by  a 
threatened  outflow  of  gold,  and  we  have  seen  that  the  alarm 
on  this  score  is  not  without  good  cause.  A  country  in  which 
credit  is  permitted  to  satisfy  temporary  needs  for  currency 
will  export  gold  only  when  it  has,  so  to  speak,  a  permanent 
surplus,  so  that  benefit  rather  than  harm  will  result  from  the 
exportation  ;  and  it  will  import  gold  only  when  there  is  need 
for  a  permanent  addition  to  its  stock. 

These  propositions  are  abundantly  confirmed  by  the  experi- 
ence of  different  countries.  England  and  the  United  States, 
the  two  countries  most  disturbed  by  gold  exports,  have  almost 
absolutely  inelastic  monetary  systems,  the  credit  money  in  each 
being  issued  under  conditions  that  forbid  an  automatic  expansion 
and  contraction  in  response  to  a  varying  demand  for  money. 
On  the  other  hand,  France  and  Canada,  each  with  a  credit 
money  almost  perfectly  elastic,  are  never  embarrassed  by  the 
movements  of  gold.  In  these  two  countries  the  rate  of  interest 
hardly  varies  from  season  to  season,  but  represents,  as  it  should, 
the  real  demand  for  and  supply  of  capital ;  whereas  in  England 
and  the  United  States  the  rate  is  almost  constantly  moving 
up  and  down,  being  kept  from  its  normal  level  by  scarcity  or 
by  overplus  of  money. 

GOVERNMENT  CREDIT  MONEY 

220.  Let  us  examine  the  different  kinds  of  credit  money  in 
use  and  determine  their  fitness  for  the  important  services  which 
this  form  of  credit  can  render.  A  hundred  years  ago  the  prom- 
issory notes  of  individuals  were  often  used  as  credit  money, 
but  in  most  countries,  on  account  of  the  importance  of  credit 
money,  the  law  now  forbids  the  issue  of  notes  for  this  use 
except  by  institutions  duly  organized.  At  the  present  time 
credit  money  is  issued  only  by  governments  or  by  banks.  In 
the  United  States  we  have  both  kinds  of  credit  money.  Sub- 
sidiary coinage  excepted,  that  being  always  issued  in  civilized 
countries  by  governments,  England  has  only  bank  notes ; 


CREDIT   MONEY  325 

Germany  and  France  have  bank  notes  and  silver  credit  money 
issued  by  the  government.  Russia  and  Austria  have  recently 
supplanted  government  notes  with  bank  notes. 

Issues  of  credit  money  by  governments,  with  some  slight 
exceptions,  have  never  been  in  response  to  a  need  for  currency 
on  the  part  of  the  people  but  have  been  the  result  of  fiscal 
necessities.  Government  credit  money  is  a  forced  loan  from 
the  people.  Governments  in  need  of  funds,  when  unable  to 
sell  bonds  to  advantage,  have  often  forced  into  circulation  their 
own  promises  to  pay  and  compelled  the  people  to  accept  these 
in  lieu  of  gold  and  silver.  These  issues  of  credit  money  always 
drive  out  a  corresponding  amount  of  metal  money,  but  the 
equivalent  of  that  metal  in  the  form  of  purchasing  power  passes 
over  to  the  government.  A  government  which  issues  demand 
notes  for  use  as  money  really  borrows  from  its  people  as  much 
as  if  it  sold  bonds  to  them  and  took  gold  in  payment.  Such  an 
issue  compels  the  people  to  send  some  of  their  gold  abroad  in 
the  purchase  of  foreign  goods  and  at  the  same  time  deprives 
some  of  them  of  the  foreign  markets  in  which  they  have  been 
selling  goods.  The  fact  that  no  man  attributes  to  the  new 
credit  money  the  subtle  change  in  prices  and  the  mysterious 
advantage  given  to  the  foreign  exporter  makes  it  possible  for 
governments  to  borrow  in  this  way  without  protest  from  the 
people.  Nevertheless  such  an  issue  of  credit  money  is  always 
a  loan  from  the  people  and  they  alone  carry  the  burden. 

A  forced  loan  from  the  people  by  the  issue  of  government 
credit  money  is  bad  from  both  the  financial  and  the  monetary 
point  of  view.  It  is  an  unwise  financial  policy,  for  the  burden 
of  the  loan  falls  upon  rich  and  poor  alike.  When  a  government 
borrows  by  the  sale  of  bonds  it  borrows  from  men  who  are 
able  to  lend  and  glad  of  the  investment ;  then  it  takes  only 
that  capital  which  can  best  be  spared  from  the  country's  wealth. 
But  when  it  borrows  by  an  issue  of  credit  money  it  lays  its 
hand  on  all  classes  of  capital  alike  and  temporarily  disturbs  the 
normal  conditions  of  every  industry. 

221.  As  currency,  government  credit  money  possesses  two 
inherent  defects  :  (i)  being  inelastic,  it  does  not  prevent  price 


326  MONEY  AND   CURRENCY 

fluctuations  ;  (2)  its  redemption  imposes  a  task  on  the  govern- 
ment for  the  proper  performance  of  which  it  lacks  natural 
facilities. 

Government  credit  money  necessarily  lacks  what  is  called 
elasticity,  for  its  quantity  cannot  be  varied  to  meet  changes  in 
the  demand  for  money.  Finance  ministers  and  parliaments  are 
not  in  touch  with  business  and  cannot  forecast  or  measure 
monetary  needs.  For  this  reason,  even  though  they  made  the 
attempt,  —  which  they  seldom  do,  —  they  could  not  by  arbitrary 
measures  make  the  volume  of  credit  money  conform  to  a  coun- 
try's needs.  In  this  important  respect  government  credit 
money  must  always  fail. 

For  the  redemption  of  credit  money  a  government  must  make 
special  and  artificial  provision.  Normally  credit  is  the  out- 
growth of  a  business  transaction,  of  a  sale  or  purchase  of  goods, 
and  something  of  value,  exchangeable  for  money,  is  always  in 
the  hands  of  the  debtor,  so  that  the  credit  is  easily  redeemed. 
A  government,  however,  is  not  engaged  in  business.  It  does 
not  issue  credit  money  in  exchange  for  live  assets.  For  the 
redemption  of  its  credit  it  must  rely  on  its  taxing  power  and 
on  the  arbitrary  massing  of  gold  in  its  treasury.  This  latter 
is  expensive  and  is  fraught  with  danger.  The  amount  of  the 
gold  reserve  is  known  to  the  public  and  every  demand  upon  it 
is  a  matter  of  common  knowledge.  It  may  be  granted  that  the 
government  has  the  power  to  maintain  a  reserve  large  enough 
for  the  purpose,  and  that  this  need  not  equal  the  full  amount 
of  credit  money  in  circulation ;  the  people,  nevertheless,  natu- 
rally regard  the  gold  reserve  as  being  very  significant  and 
important,  and  any  extraordinary  redemption  of  credit  money 
is  certain  to  provoke  discussion  and  alarm.  Since  everybody 
knows  that  the  gold  reserve  is  not  equal  to  the  possible 
demand  upon  it,  there  is  apt  to  arise  an  unreasoning  fear  lest 
it  may  be  exhausted  and  the  credit  money  in  consequence 
depreciate.  The  government,  if  the  gold  reserve  is  depleted, 
can  replenish  it  only  by  the  sale  of  bonds  or  by  appeal  to 
bankers  for  assistance,  and  such  steps  are  liable  to  increase 
popular  distrust. 


CREDIT   MONEY  327 

The  United  States  is  the  only  nation  in  the  world  which  now 
maintains  a  gold  reserve  for  the  redemption  of  credit  money. 
In  all  other  countries  credit  money,  when  it  is  redeemed  at 
all,  is  taken  care  of  by  banking  institutions  more  or  less  related 
to  the  government.  These  banking  institutions,  on  account  of 
their  important  place  in  business  affairs,  are  able  to  influence 
the  market  rate  of  interest  and  so  can  attract  gold  in  a  natural 
way  by  raising  their  rate  of  discount.  In  the  same  way  it  is 
possible  for  them  to  discourage  the  export  of  gold  by  raising 
the  interest  rate,  for  the  profit  which  the  owners  of  gold  can 
get  from  it  within  the  country  is  thus  increased.  The  United 
States,  however,  is  unable  to  adopt  these  measures  either  to 
increase  its  gold  reserve  or  to  prevent  its  depletion.  It  can 
maintain  the  parity  of  its  credit  money  only  by  the  adop- 
tion of  measures  which  attract  public  attention  and  tend  to 
augment  the  danger,  for  people  easily  grow  suspicious  and 
present  credit  money  for  redemption,  not  because  they  need 
the  gold  for  international  uses  but  simply  to  be  on  the  safe 
side. 

222.  Still  another  risk,  especially  in  a  republic,  attends  the 
use  of  government  credit  money.  This  risk  is  psychological  in 
nature.  The  money  is  so  easily  issued  and  costs  so  little  that 
people  get  the  impression  that  it  is  the  best  possible  kind. 
Since  goods  are  exchanged  with  credit  money  as  readily  as 
with  gold,  the  average  man  is  unable  to  understand  why  credit 
money  should  not  be  used  altogether ;  so  when  the  government 
needs  money  in  any  emergency  he  is  inclined  to  favor  the  use 
of  more  credit  money  rather  than  the  imposition  of  higher  taxes 
or  the  sale  of  interest-bearing  bonds.  Taxes  attack  his  pocket 
directly,  and  the  bonds  he  knows  must  be  paid  in  the  future ; 
whereas  by  the  issue  of  credit  money  the  government  seems  to 
get  the  same  result  without  imposing  a  burden  on  anybody. 
People  do  not  understand  the  effect  which  the  issue  of  credit 
money  has  upon  the  value  of  money,  and  hence  are  prone  to 
clamor  for  its  issue  beyond  the  point  of  safety.  After  the  Civil 
War,  for  example,  many  people  were  convinced  that  the  green- 
back was  better  "money"  than  gold. 


328  MONEY  AND   CURRENCY 

PROPER  LIMIT  OF  ISSUE 

223.  It  is  impossible  at  any  time  to  fix  the  safety  limit  for 
the  issue  of  government  credit  money.    A  stable  government 
in  which  people  have  full  confidence  can  evidently  issue  a  larger 
quantity  than  one  in  whose  stability  or  financial  power  there  is 
little  confidence.    The  quantity  of  credit  money  which  a  govern- 
ment can  maintain  at  par  must  evidently  vary  at  different  times. 
When  peace  prevails  and  taxes  are  easily  collected  a  larger 
quantity  of  credit  money  can  be  kept  at  par  than  in  time  of  war 
or  in  times  when  the  poverty  of  the  people  is  reducing  the  tax 
receipts.    Credit  money  can  be  made  to  serve  its  true  purpose 
only  so  long  as  the  people  have  faith  in  the  power  and  pur- 
pose of  the  government  to  redeem  it ;  the  moment  that  faith 
wavers  the  credit  money  will  depreciate  on  account  of  a  lessen- 
ing demand  for  it. 

Theoretically  it  is  possible  for  a  nation  in  which  the  people 
have  absolute  confidence  to  keep  at  par  an  issue  of  credit  money 
equal  to  the  total  amount  of  gold  which  would  be  in  circulation 
if  no  credit  money  were  issued.  No  country  could  do  this,  of 
course,  unless  it  constantly  redeemed  its  credit  money  upon 
demand.  Such  a  government  would  be  obliged  to  maintain  a 
gold  reserve  for  redemption  purposes,  and  experience  alone  could 
decide  how  large  this  reserve  ought  to  be.  If  people  had  abso- 
lute confidence  in  the  ability  and  will  of  the  government  to 
redeem  the  credit  money,  and  preferred  it  to  gold  as  a  medium 
of  exchange  and  as  a  store  of  value,  so  that  the  banks  of  the 
country  kept  their  reserves  in  credit  money,  then  it  would  be 
presented  for  redemption  only  by  people  who  desired  gold  for 
international  payments.  What  this  demand  would  amount  to 
would  depend  upon  the  country's  position  as  a  producer  and 
consumer  of  gold  and  upon  the  extent  to  which  its  need  for 
currency  varied  from  season  to  season. 

224.  A  certain  amount  of  government  credit  money  may  be 
kept  at  par  with  gold  even  though  no  provision  is  made  for  its 
redemption.    The  monetary  systems  of  Germany,  France,  and 
the  United  States  evidence  the  truth  of  this  proposition.    About 


CREDIT  MONEY  329 

one  fifth  of  Germany's  money  consists  of  silver  coins  which  the 
government  does  not  undertake  to  redeem  in  gold.  Nearly  one 
third  of  the  money  of  France  is  silver  which  cannot  be  exchanged 
for  gold  except  at  the  pleasure  of  the  Bank  of  France.  The 
United  States  has  long  maintained  at  par  with  gold  five  hun- 
dred million  dollars  of  silver  money,  although  the  law  does  not 
provide  for  its  redemption. 

Why  does  this  irredeemable  credit  money  not  depreciate? 
There  are  several  reasons.  First,  because  the  governments  of 
these  countries  have  made  this  credit  money  legal  tender  for 
the  payment  of  all  debts,  including  public  dues,  and  thus  have 
given  it  a  large  field  of  usefulness.  But  this  alone  would  not 
keep  the  credit  money  at  par.  There  is  another  force  at  work, 
namely,  the  confidence  of  the  people  in  the  good  faith  of  their 
rulers,  who  in  making  this  credit  money  legal  tender  have  given 
the  people  an  implicit  ptedge  that  it  shall  be  kept  at  par  with 
gold.  If  any  one  of  these  nations  should  increase  the  supply 
of  its  irredeemable  credit  money  to  such  an  extent  as  to  arouse 
doubt  with  regard  to  its  future  purchasing  power,  there  would 
be  danger  of  immediate  depreciation,  for  business  men  would 
begin  to  discriminate  against  it.  Something  of  the  sort  hap- 
pened in  the  United  States  with  regard  to  the  silver  dollar 
after  its  coinage  began  in  1878.  The  banks  of  New  York,  for 
example,  refused  to  count  silver  as  part  of  their  reserve,  and 
many  business  men  when  making  contracts  running  over  a 
period  of  years  inserted  a  clause  guaranteeing  payment  in  gold. 

A  third  reason  why  this  unredeemed  credit  money  is  kept  at 
par  with  gold  is  the  fact  that  it  is  in  small  denominations  and 
so  forms  the  pocket  money  of  the  people.  It  is  needed  by  the 
people  every  day  and  is  never  held  in  large  quantities  by  any 
one  person  or  institution.  A  man  who  wishes  gold  for  export 
would  not  think  of  getting  together  silver  dollars  in  order  to 
have  them  exchanged  for  gold,  even  though  they  were  directly 
redeemable. 

We  may  conclude,  therefore,  that  any  country  with  an  honest, 
stable  government  may  safely  have  in  circulation  credit  money 
of  small  denominations  —  say  $10  and  under  in  the  United 


330  MONEY  AND   CURRENCY 

States  —  to  an  amount  not  exceeding  the  sum  required  by  the 
people  as  pocket  and  till  money.  If  more  than  this  amount  is 
issued,  the  surplus  is  liable  to  accumulate  in  the  hands  of  some 
person  or  bank  and  to  give  rise  to  dangerous  conjecture  as  to 
its  value. 

225.  Should  credit  money  be  a  legal  tender  ?  To  this  question 
no  general  or  positive  answer  should  be  offered,  for  much  de- 
pends on  the  conditions  of  issue  and  on  the  security  provided 
for  redemption.  When  credit  money  is  simply  a  certificate  of 
gold  deposited,  as  are  the  notes  of  the  Bank  of  England  and  the 
gold  certificates  of  the  United  States,  there  is  no  reason  why  its 
acceptance  should  not  be  compelled  by  legal-tender  enactment. 
In  the  United  States  $400,000,000  in  gold  certificates  are  in  cir- 
culation, and  these  certificates  are  a  title  to  $400,000,000  in 
coined  gold  held  in  trust  by  the  national  Treasury.  These  certifi- 
cates, therefore,  'may  be  treated  as  being  practically  gold  itself, 
and  might  safely  be  made  legal  tender.  Under  the  law,  however, 
they  are  merely  "  lawful  money  "  in  the  reserves  of  banks,  so 
they  serve  as  a  basis  for  credit  exactly  as  would  a  like  amount 
of  gold.  The  notes  of  the  Bank  of  England,  which  represent 
for  the  most  part  gold  deposited  in  the  Bank,  are  a  legal  ten- 
der throughout  the  United  Kingdom,  it  being  assumed  that  the 
notes  are  a  good  title  to  gold  actually  in  the  Bank's  possession. 

The  case  is  different  with  credit  money  unsecured  by  a 
deposit  of  real  money,  such,  for  instance,  as  our  greenbacks 
and  silver  dollars.  These  are  not  titles  to  money  deposited  or 
to  property  of  any  kind  ;  they  are  mere  promises.  To  be  sure, 
the  government  holds  a  gold  reserve  of  $  1 50,000,000  for  redemp- 
tion purposes,  but  this  fund  is  only  about  one  seventh  of  the 
outstanding  greenbacks  and  silver  dollars.1  These  are  now 
legal  tender  and  lawful  money.  Hence  in  the  banks  they  may 
be  made  the  basis  for  an  expansion  of  bank  credits  amounting 
to  four  or  five  times  their  amount ;  in  other  words,  to  $4,000,- 
000,000  or  $5,000,000,000.  Practically  this  is  what  has  taken 
place,  so  that  we  have  one  credit  system  based  upon  another, 

1  The  quantity  of  greenbacks  in  existence  is  estimated  at  $347,000,000  ;  of  silver 
dollars,  about  $600,000,000. 


CREDIT  MONEY  331 

the  whole  mass  resting,  like  an  inverted  pyramid,  upon  a  rela- 
tively slight  foundation  of  gold. 

A  proposal  to  deprive  any  part  of  our  fiduciary  circulation  of 
its  legal-tender  property  would  doubtless  meet  with  no  popular 
or  political  favor  at  the  present  time;  yet  if  gold  and  gold  certifi- 
cates were  the  only  form  of  lawful  money,  so  that  banks  on 
demand  could  be  compelled  to  redeem  their  note  and  deposit 
credits  in  gold,  our  monetary  system  would  be  much  more 
secure  than  it  now  is.  This  radical  change,  however,  should 
not  be  made  unless  provision  were  made  at  the  same  time  for 
a  safe  and  elastic  bank-note  circulation,  which  now  is  lacking. 

BANK  CREDIT  MONEY 

226.  The  bank  note,  which  is  a  bank's  promise  to  pay  money 
to  bearer,  is  bank  credit  money.  Under  the  proper  conditions 
of  issue  and  redemption  it  is  ideal  credit  money,  —  an  inexpen- 
sive substitute  for  gold  as  hand-to-hand  money  and  perfectly 
elastic  in  volume. 

Unfortunately,  as  a  practical  matter,  it  is  not  always  easy  to 
determine  what  are  the  proper  conditions  of  issue  and  redemp- 
tion ;  hence  the  subject  is  a  cause  of  much  dispute  and  dis- 
agreement. In  this  chapter  only  certain  general  principles  can 
be  stated.  A  thorough  discussion  of  the  subject  would  be  pos- 
sible only  in  a  complete  treatise  on  banking. 

Let  us  first  notice  the  points  of  difference  and  resemblance 
between  the  bank  note  and  bank  deposit,  (i)  Both  alike  are  the 
bank's  debts,  —  its  promises  to  pay  money,  —  the  note  being 
payable  to  bearer,  the  deposit  to  an  individual ;  and  (2)  both  are 
redeemable  on  demand.  Here  we  have  the  only  points  of  resem- 
blance. The  points  of  difference  are  four  :  (i)  The  deposit  gives 
rise  to  checks  and  drafts,  an  exchange  medium  of  limited  accepta- 
bility;  whereas  the  notes  possess  general  acceptability  and  pass 
current  as  money.  (2)  The  deposit  is  a  debt  to  an  individual 
who  voluntarily  puts  trust  in  the  bank  ;  whereas  the  note,  since 
it  passes  current  as  money,  often  gets  into  the  hands  of  persons 
who  have  no  knowledge  of  the  bank.  (3)  The  so-called  deposit 


332  MONEY  AND   CURRENCY 

currency,  growing  out  of  a  deposit,  i.e.  checks  and  drafts,  is 
negotiable  and  current,  even  to  a  limited  degree,  only  after 
indorsement  by  the  payee,  and  usually  the  indorsement  is 
required  of  every  person  through  whose  hands  it  passes,  so 
that  this  currency  is  a  combination  of  bank  and  personal  credit; 
whereas  the  bank  note  is  pure  bank  credit,  no  indorsement  by 
holders  being  required.  (4)  Bank  checks  and  drafts,  since  they 
possess  only  limited  acceptability,  have  a  short  life  and  do  not 
get  wide  circulation,  being  promptly  sent  in  for  redemption ; 
but  bank  notes,  being  easily  passed  on  from  hand  to  hand,  are 
liable  to  remain  long  in  circulation  and  to  cover  a  broad  field, 
holders  preferring  to  pass  them  on  rather  than  to  bear  the 
slight  expense  incident  to  redemption. 

227.  Because  of  these  important  differences  it  is  generally 
admitted  that  banks  should  not  be  allowed  the  same  freedom 
in  the  issue  of  notes  that  they  enjoy  in  the  creation  of  deposit 
liabilities.    It  may  fairly  be  said  that  there  is  no  dispute  with 
regard  to  the  necessity  for  the  following  general  precautions  : 
(i)  that  the  maximum  issue  of  notes  permitted  to  a  bank  should 
at  a  given  time  be  definitely  fixed,  it  being  possible  to  raise  this 
limit  when  conditions  warrant ;  (2)  that  certain  special  provi- 
sions should  be  made  to  secure  the  convertibility  and  redemption 
of  bank  notes. 

With  regard  to  the  limit  of  issue  advisable  there  is  some 
difference  of  opinion.  The  usual  practice  is  to  limit  the  note 
issues  to  the  amount  of  a  bank's  capital  stock.  In  some  coun- 
tries, as  in  Germany,  the  limit  is  variable,  being  in  proportion 
to  the  amount  of  money  reserve.  The  note  issues  of  the  Bank 
of  France  have  an  arbitrary  limit,  —  5,000,000,000  fr.,  — but  it 
is  known  that  this  limit  will  be  raised  as  the  country  grows  and 
its  need  for  currency  increases. 

CONVERTIBILITY  OF  BANK  NOTES 

228.  Of  the  various  special  provisions  urged  to  secure  the 
convertibility  of  bank  notes  the  following  are  the  most  impor- 
tant:  (i)  that  the  notes  constitute  a  first  lien  on  the  assets 


CREDIT   MONEY  333 

of  the  bank  ;  (2)  that  the  stockholders  in  case  of  a  bank  failure 
be  liable  to  an  assessment  equal  to  the  par  value  of  their  stock, 
and  that  note  holders  have  a  first  lien  on  the  proceeds  of  such 
assessment ;  (3)  that  banks  of  issue  maintain  a  common  "  safety 
fund,"  in  the  possession  of  the  government,  to  be  used  if  neces- 
sary in  the  redemption  of  the  notes  of  any  failed  bank  ;  (4)  that 
banks  shall  deposit  with  the  government  bonds  or  stocks  equal 
in  value  to  the  face  value  of  the  notes  which  they  issue  ;  (5)  that 
banks  be  required  to  keep  in  reserve  a  stock  of  money  equal  to 
the  amount  of  notes  issued. 

In  weighing  the  merits  of  these  measures  we  need  keep  only 
this  one  question  in  mind  :  Will  this  proposed  provision  inter- 
fere with  the  elasticity  of  the  bank  note?  That  is  the  test. 
If  an  affirmative  answer  is  necessary,  the  measure  should  be 
rejected.  For  if  bank  notes  are  to  be  fixed  in  volume,  not 
responsive  to  changing  monetary  needs,  there  is  no  good  reason 
why  their  issue  should  be  permitted.  They  would  have  all  the 
faults  of  government  credit  money  and  their  volume  would  not 
be  so  easily  regulated. 

Let  us  briefly  examine  the  measures  proposed.  The  first  two 
would  certainly  have  no  hurtful  effect.  The  depositor,  since  he 
is  a  voluntary  creditor  of  a  bank,  cannot  justly  complain  if  a 
prior  lien  is  given  the  note  holder.  The  objection  that  deposi- 
tors really  have  no  choice,  since  men  must  use  banks,  does  not 
hold,  for  banks  of  deposit  which  issue  no  notes  exist  in  all 
countries,  and  others  would  be  quickly  organized  should  people 
show  reluctance  to  deposit  in  note-issuing  banks.  Both  these 
measures  are  part  of  the  Canadian  banking  system. 

The  safety-fund  provision  is  unobjectionable.  That  it  is  an 
effective  measure  is  shown  by  the  test  of  experience  in  the 
United  States  as  well  as  by  its  present  operation  in  Canada. 
From  its  use  flows  indirectly  this  important  advantage :  it 
makes  the  solvency  of  each  bank  a  matter  of  pecuniary  impor- 
tance to  all  its  competitors  and  stimulates  among  bankers  an 
alert  and  beneficial  scrutiny  of  all  banking  interests.  Should 
a  Canadian  bank  extend  its  credit  to  the  point  of  hazard,  it 
would  quickly  hear  from  its  neighbors  ;  and  a  speculating  or 


334  MONEY  AND   CURRENCY 

immoral  bank  officer  must  dodge  the  eyes  of  all  bank  employees 
in  the  Dominion. 

The  requirement  of  a  bond  deposit,  while  it  may  provide  an 
adequate*  security,  introduces  an  investment  element  which 
effectually  prevents  banks  from  issuing  notes  in  response  to 
monetary  needs.  National  banks  in  the  United  States  have 
been  issuing  notes  in  accordance  with  this  system  ever  since 
the  Civil  War,  and  their  experience  furnishes  abundant  evidence 
that  notes  thus  issued  perform  no  useful  service.  They  are 
elastic  enough,  but  their  elasticity  is  perverse,  even  vicious, 
for  they  expand  in  volume  when  contraction  is  needed  and 
contract  when  expansion  is  called  for.  In  dull  times,  when  the 
supply  of  currency  is  already  excessive  and  the  rate  of  discount 
low,  banks  are  tempted  to  increase  their  investments  in  bonds 
and  to  enlarge  their  circulation.  This  is  exactly  what  they  did 
in  1894  and  1895,  although  the  redundancy  of  the  currency  in 
those  years,  as  will  be  shown  in  the  next  chapter,  was  causing 
gold  exports  that  nearly  bankrupted  the  national  Treasury.  On 
the  other  hand,  in  good  times,  when  banks  are  able  to  lend  all 
their  credit  at  high  rates  of  interest,  they  are  prone,  no  matter 
what  the  need  for  currency,  to  reduce  their  circulation  and  sell 
their  bonds  in  order  to  increase  their  money  reserve. 

The  currency  needs  of  the  United  States,  for  example,  are 
some  $100,000,000  larger  in  the  autumn  than  in  the  summer. 
This  increase  is  expected  every  year,  and  the  cause  of  it  —  the 
harvesting  and  selling  of  the  crops  —  is  well  understood,  yet 
the  national  banks  never  on  this  account  increase  their  issues 
of  notes.  A  national  bank  which  increases  its  circulation  in 
September  assumes  an  investment  risk ;  it  may  have  to  sell 
the  bonds  in  January  at  a  lower  price  than  it  pays  for  them  in 
September,  and  so  may  incur  loss  instead  of  profit.  A  second 
risk  is  involved,  although  this  is  not  an  essential  fault  of  the 
bond-deposit  requirement.  The  law  places  a  limit  upon  the 
amount  of  national  bank  notes  which  may  be  retired  in  any  one 
month  by  the  deposit  of  lawful  money  with  the  Treasurer  of  the 
United  States.  This  limit  was  originally  fixed  at  $3,000,000, 
but  in  February,  1907,  it  was  raised  to  $9,000,000.  On  account 


CREDIT  MONEY  335 

of  this  restriction  upon  the  retirement  of  notes,  a  bank  cannot 
always  promptly  recover  possession  of  its  deposited  bonds  when 
the  condition  of  the  government  bond  market  makes  the  sale  of 
bonds  advisable. 

The  fifth  measure,  requiring  a  bank  to  hold  a  reserve  of 
money  equal  to  the  amount  of  the  notes  issued,  is  in  operation 
in  the  Bank  of  England.  It  destroys  elasticity,  and  indeed  was 
first  recommended  by  a  school  of  writers  and  bankers  who 
argued  that  elasticity  is  not  a  desirable  element  in  the  currency. 
They  are  commonly  known  as  the  "currency  school,"  their 
chief  tenet  being  the  theory  that  bank  notes  cannot  be  a 
harmless  substitute  for  gold  unless  they  represent,  sovereign 
for  sovereign,  gold  held  in  the  vaults  of  the  issuing  bank. 
Bank  notes  thus  secured  are  merely  a  warehouse  receipt  for 
gold  and  are  not  bank  credit  in  any  proper  sense  of  the  word. 

Two  "  SCHOOLS  "  OF  BANKING 

229.  In  the  discussion  prior  to  the  Bank  Act  of  1844,  which 
now  regulates  the  operations  of  the  Bank  of  England,  the 
adherents  of  the  currency  school  held  the  view  that  bank 
notes,  unless  merely  representative  of  an  equal  amount  of  gold, 
inflated  prices  and  led  to  speculation.  They  were  opposed  by 
adherents  of  the  "banking  school,"  who  held  that  notes 
would  not  be  issued  to  excess  and  would  not  inflate  prices  if 
bankers,  unhampered  by  artificial  restrictions,  were  left  free  to 
use  their  own  judgment. 

Banking  experience  in  England  and  in  the  United  States 
affords  some  justification  for  each  of  these  opposite  views. 
Prior  to  1844  England  had  suffered  from  an  unscientific  issue 
of  bank  notes.  As  a  heritage  of  the  Restriction  Period,  briefly 
described  in  Chapter  XIV,  the  notes  of  the  Bank  of  England 
retained  their  legal-tender  characteristic  and  were  used  as  the 
reserve  for  note  issues  by  innumerable  small  banks.  Thus 
credit  was  based  on  credit.  The  one  thing  most  essential  to 
the  soundness  of  a  banking  circulation,  a  system  insuring 
swift  and  certain  redemption,  was  entirely  lacking.  The  Bank 


336  MONEY  AND   CURRENCY 

of  England  alone  redeemed  in  gold.  The  small  banks  scattered 
their  notes  as  widely  as  possible  and,  there  being  no  redemp- 
tion centers,  were  able  to  postpone  payment  and  keep  in  cir- 
culation more  notes  than  otherwise  would  have  been  possible ; 
and  when  they  did  redeem  their  notes  they  did  so  in  notes 
of  the  Bank  of  England.  Undoubtedly  bank  notes  issued  under 
such  conditions  are  a  dangerous  element  in  the  currency  of  a 
country,  and  the  view  of  the  currency  school  was  in  that  case 
justified. 

But  the  adherents  of  the  banking  school  had  another 
situation  in  view,  and  they  also  were  right.  They  held  that  if 
banks  were  compelled  to  redeem  their  notes  in  gold,  and  that 
if  redemption  were  made  easy  and  inexpensive,  banks  might  be 
given  perfect  freedom  of  issue  and  yet  not  be  able  to  issue 
notes  in  excess.  That  this  view  is  essentially  sound  is  proved 
to-day  by  the  successful  operation  of  the  banks  of  Canada  and 
the  Bank  of  France,  which  are  good  illustrations  of  the  so- 
called  banking  principle. 

EASE  OF  REDEMPTION  NECESSARY 

230.  That  ease  of  redemption  is  essential  to  sound  banking 
circulation  is  a  point  too  often  ignored.  No  matter  how  ade- 
quately the  notes  are  secured  or  how  strictly  their  volume 
is  limited,  if  the  holder  of  a  note  cannot  without  friction  or 
expense  exchange  it  for  money,  it  will  be  liable  to  remain  in 
circulation  after  the  need  creating  it  has  been  satisfied,  and  so 
will  induce  inflation  if  not  depreciation. 

To  secure  ease  of  redemption  and  prevent  inflation  the  fol- 
lowing measures,  some  of  them  positive  and  some  negative,  are 
essential. 

1.  Banks  should  be.  obliged  to  redeem  their  notes  in  gold. 
This  requirement  would  insure  the  presence  of  an  abundance  of 
money  and  its  proper  distribution  throughout  the  country. 

2.  Banks  should  be  required  to  redeem  their  notes  not  only 
over  their  own  counters  but  in  redemption  centers  conveniently 
situated   in   different   parts    of    the    country.    In   Canada,   for 


CREDIT   MONEY  337 

instance,  a  redemption  center  in  each  province  is  found  suffi- 
cient. In  the  United  States  a  dozen  redemption  centers  would 
probably  be  necessary.  Through  its  subtreasuries  the  govern- 
ment might  do  some  of  this  work  for  the  banks  with  less  cost 
than  it  could  be  done  by  the  banks. 

3.  Bank  notes   should  possess  no   legal-tender  quality  and 
have  no  forced  circulation.    The  government  should  be  free  to 
reject  them,  and  no  bank  should  be  obliged  to  accept  the  notes 
of  other  banks.    The  notes  should  represent  bank  credit  and 
should  be  current  as  such.    To  the  extent  that  they  are  legal 
tender  the  motive  impelling  redemption  is  weakened.1 

4.  If  a  limit   is  placed  upon  the  total  issue  permitted,  it 
.should  be  above  the  maximum  attained  at  any  season  of  the 
year;   otherwise  the  banks  would  be  debarred  from  satisfying 
extreme  needs  of  the  country  for  currency.    Furthermore,  it  is 
not  desirable  that  a  bank  should  ever  have  in  circulation  all  the 
notes  it  is  permitted  to  issue,  for  then  it  might  pay  out  the 
notes  of  other  banks  instead  of  sending  them  home  for  redemp- 
tion, since  it  would  be  unable  to  replace  them  with  its  own. 
Any  condition  which  impedes  redemption  must  be  avoided. 

If  bank  notes  were  issued  under  these  conditions  and  their 
ultimate  convertibility  were  properly  safeguarded,  their  volume 
would  vary  in  most  sensitive  response  to  the  needs  of  business 
and  would  never  be  in  excess  of  these  needs.  An  issue  of  such 
bank  notes  would  not  inflate  prices  ;  it  would  simply  prevent 
a  fall  of  prices.  Any  increase  of  confidence  in  a  community 
which  led  to  an  increased  use  of  credit  of  all  kinds  would  natu- 
rally cause  a  rise  of  prices  and  so  make  room  for  more  bank 
notes  in  the  circulating  medium  ;  but  the  bank  notes  them- 
selves would  not  cause  the  rise.  Bank  A  would  pay  out  its 
own  notes  when  depositors  asked  for  cash  and  would  strive  to 
keep  as  many  out  as  possible ;  but  all  other  banks,  when  their 
depositors  turned  in  the  notes  of  Bank  A,  would  immediately 
send  them  to  the  latter  for  redemption,  for  each  of  the  other 
banks  would  be  seeking  to  get  its  own  notes  into  circulation 

1  National  bank  notes  are  legal  tender  in  certain  payments.  The  particulars 
are  given  on  page  365. 


338  MONEY  AND   CURRENCY 

and  to  convert  the  notes  of  other  banks  into  gold  in  order  to 
strengthen  its  reserve. 

Thus  under  this  natural  system  of  note  issue  two  forces 
automatic .  and  independent  of  law  would  continually  be  at 
work,  the  one  tending  to  scatter  bank  notes  over  the  land,  the 
other  drawing  them  surely  and  swiftly  to  their  sources.  Canada 
has  a  banking  system  very  much  like  the  one  here  outlined, 
and  judged  by  results  it  is  one  of  the  best  in  the  world.  The 
smooth  operation  of  that  system  should  not,  as  is  sometimes 
attempted,  be  ascribed  merely  to  the  wisdom  and  shrewdness 
of  the  bankers  who  administer  it ;  the  system  is  itself  the  father 
of  the  keen  Canadian  banker. 

23 1.  It  is  not  necessary  that  the  United  States  should  imitate 
all  the  features  of  the  Canadian  system.  Many  reformers  seem 
to  think  that  the  branch  bank  is  an  essential  feature  of  the 
system,  and  so  seek  to  have  it  incorporated  in  that  of  the 
United  States.1  This  is  a  mistake.  The  branch  bank  has  done 
good  service  in  Canada  and  is  always  useful  in  a  new  and 
sparsely  settled  country,  but  the  need  for  it  in  the  United 
States  is  fast  disappearing.  At  any  rate  it  is  not  essential  to 
a  good  system  of  bank  notes.  The  essential  thing  is  ease  of 
redemption.  Branch  banks  contribute  toward  this,  but  it  can 
be  attained  without  them  if  redemption  agencies  are  properly 
distributed.  In  the  United  States  these  redemption  agencies 
might  be  allowed  the  rights  of  a  branch  bank,  but  a  general 
system  of  branches  would  not  be  necessary. 

Banking  reform  is  a  live  question  in  the  United  States  to-day. 
The  Civil  War,  by  giving  us  the  National  Bank  Act,  —  adopted 
as  an  aid  to  the  government  in  the  sale  of  its  bonds,  —  inter- 
rupted the  natural  course  of  our  banking  evolution.  The 
present  generation  of  bankers,  bred  in  an  artificial  atmosphere 
and  supported  at  almost  every  step  by  the  law  as  by  a  crutch, 
are  not  ready  yet  for  the  management  of  a  perfect  banking 
system.  Such  a  system  must  be  a  growth,  —  an  evolution,  — 
and  the  men  who  manage  it  must  learn  their  lessons  slowly  and 

1  Canada  has  thirty-four  banks  and  there  were  in  1905  about  one  thousand 
branches. 


CREDIT   MONEY  339 

thoroughly.  A  system  like  that  of  Canada  cannot  be  suddenly 
and  artificially  transplanted  to  the  United  States.  That  our 
system  will  be  gradually  improved  seems  certain,  but  that  it 
will  be  radically  changed  in  any  one  year  is  improbable.1 


LITERATURE 

HORACE  WHITE,  Money  and  Banking,  Books  II  and  III ;  Report  of  the 
Indianapolis  Monetary  Commission;  N.  G.  PIERSON,  Principles  of  Econom- 
ics; H.  R.  SEAGER,  Introduction  to  Economics  ;  C.  F.  DUNBAR,  Chap- 
ters on  the  History  and  Theory  of  Banking;  C.  A.  CONANT,  A  History  of 
Modern  Banks  of  Issue,  and  Principles  of  Money  and  Banking;  F.  A. 
CLEVELAND,  The  Bank  and  the  Treasury;  R.  M.  BRECKINRIDGE,  The 
Canadian  Banking  System ;  D.  R.  DEWEY,  Financial  History  of  the  United 
States;  DAVID  KINLEY,  Money,  chaps,  xvi  and  xvii;  J.  L.  LAUGHLIN, 
Principles  of  Money,  chaps,  xiii-xv  ;  The  Currency,  Report  of  Special  Cur- 
rency Committee  of  the  New  York  Chamber  of  Commerce,  1906. 

1  The  reader  should  note  that  various  classifications  of  credit  money  are  pos- 
sible. We  have  discussed  convertible  and  inconvertible  credit  money,  govern- 
ment and  bank  credit  money,  legal-tender  and  non-legal-tender  credit  money, 
also  metallic  and  paper  credit  money.  The  classification  depends  entirely  on  the 
point  of  view;  the  principles  underlying  the  value  of  credit  money  are  the  same 
no  matter  what  the  classification,  and  it  is  with  principles  that  we  are  chiefly  con- 
cerned. The  following  classification  the  reader  may  find  helpful,  (i)  Pure  credit 
money,  —  that  which  is  unsecured  by  a  deposit  of  money,  such  as  the  Canadian 
bank  notes  ;  (2)  representative  money,  —  that  which  is  secured  by  a  deposit  of  an 
equal  amount  of  money,  such  as  the  Bank  of  England  notes  and  the  gold  certifi- 
cates of  the  United  States  Treasury ;  and  (3)  token  money,  being  credit  money  of 
small  denominations  and  limited  legal-tender  power,  such  as  silver  half  dollars, 
quarters,  and  dimes,  and  nickels  and  pennies.  According  to  this  classification  the 
greenback  and  the  silver  dollar,  being  only  partially  secured  by  a  deposit  of  money, 
would  properly  be  classed  as  pure  credit  money.  The  national  bank  note  is  pure 
credit  money,  but  since  it  is  practically  guaranteed  by  the"  government  and  is 
secured  by  a  deposit  of  government  bonds,  it  is  more  government  credit  than 
bank  credit. 


CHAPTER  XVI 

MONEY  IN   THE  UNITED   STATES 

232.  The  period  of  bimetallism  with  gold  undervalued  at  the  mint,  1792  to 
1834.  (a)  Why  bimetallism  was  not  maintained.  (t>)  The  loss  of  silver  dollars 
through  the  operation  of  Gresham's  law  in  the  Orient,  (c)  The  monetary  con- 
fusion during  the  War  of  1812.  233.  Change  of  ratio  in  1834  to  16  to  i,  gold 
thereby  becoming  the  standard.  Gold  coins  were  debased  6  per  cent,  but  this  did 
not  mean  a  corresponding  debasement  of  the  standard.  234.  Subsidiary  silver 
coins  debased  in  1853  to  prevent  their  exportation.  235.  The  act  of  1873  suspend- 
ing the  free  coinage  of  silver.  236.  The  unsuccessful  experiment  with  trade 
dollars.  237.  The  "limping  standard"  from  1879  to  1890,  legal-tender  silver 
dollars  being  coined  under  the  Bland- Allison  Act.  238.  The  Bland-Allison  dollar 
was  an  anomaly ;  it  could  be  regarded  either  as  fiat  money  or  as  implied  credit 
money.  239.  Why  the  act  of  1878  disappointed  the  friends  of  silver.  240.  Why 
the  evils  predicted  by  its  opponents  were  not  realized.  241.  The  issue  of  silver 
certificates  was  necessary  because  of  the  limited  demand  for  silver  dollars. 
242.  Why  the  act  of  1878  resulted  in  the  coinage  of  more  than  two  million  silver 
dollars  per  month.  243.  Analysis  of  the  monetary  system  as  it  existed  in  1890. 
244.  The  Sherman  Act  of  1890,  ordering  the  purchase  of  4,500,000  ounces  of  silver 
per  month,  contained  the  first  legislative  recognition  of  the  silver  dollar  as  credit 
money.  245.  It  failed  to  raise  the  price  of  silver  or  to  increase  the  supply  of 
currency;  inflation  caused  exportation  of  gold.  246.  Bond  issues  to  protect  the 
gold  reserve  made  necessary  in  1894,  1895,  and  1896  by  redundancy  of  the  cur- 
rency. 247.  The  greenback  not  primarily  responsible  for  the  operation  of  the 
"  endless  chain."  248.  The  national  Treasury  should  not  be  permitted  to  inflate 
or  contract  the  currency.  249.  Leading  provisions  of  the  act  of  March  14,  1900, 
which  explicitly  declares  the  gold  dollar  to  be  the  "standard  unit  of  value." 
250.  Analysis  of  the  currency  supply  of  February  i,  1905. 

232.  It  would  be  difficult  to  name  any  kind  of  money  or  credit 
money,  whether  bank  note  or  government  paper,  with  which 
the  people  of  the  United  States  have  not  had  experience.  It 
is  the  purpose  of  this  chapter  not  to  give  the  monetary  history 
of  this  country  in  detail,  but  to  sketch  the  evolution  of  our 
present  system,  dwelling  at  length  only  upon  those  changes  or 
experiences  which  throw  light  upon  fundamental  principles. 
Our  present  monetary  system  is  not  the  product  of  a  carefully 
planned  legal  enactment ;  it  has  come  to  us  as  an  inheritance 

340 


MONEY   IN   THE  UNITED   STATES  341 

from  the  fathers  of  the  republic,  but  so  trimmed  and  amended 
by  succeeding  generations,  to  meet  temporary  exigencies,  that 
its  framers  would  not  recognize  it. 

Our  monetary  history  can  for  convenience  be  divided  into 
five  epochs:  (i)  1792-1834,  the  period  of  bimetallism  with 
gold  undervalued  at  the  mint;  (2)  1834-1861,  the  period  of 
bimetallism  with  silver  undervalued ;  (3)  1862-1879,  tne  green- 
back period;  (4)  1879-1890,  the  period  of  the  "  limping 
standard"  ;  (5)  1890  to  date,  the  period  of  positive  gold  stand- 
ard. We  have  already  had  occasion  to  refer  to  several  impor- 
tant events  marking  these  different  periods,  and  in  Chapter  XIII 
have  told  the  story  of  the  greenback  era  in  as  much  detail  as 
space  permits.  In  this  chapter  we  will  examine  the  salient 
features  of  the  four  remaining  epochs. 

FIRST  BIMETALLIC  PERIOD 

In  1792,  in  conformity  with  a  plan  drafted  by  Alexander 
Hamilton,  the  first  Secretary  of  the  Treasury,  Congress  adopted 
the  dollar  as  the  monetary  unit,  and  provided  that  it  should 
consist  either  of  371.25  grains  of  pure  silver,  or  of  24.75  grains 
of  pure  gold.  This  was  bimetallism  at  the  ratio  of  15  to  I, 
for  both  gold  and  silver  coins  were  made  legal  tender  and  the 
free  coinage  of  each  was  permitted.  The  monetary  circulation 
at  the  time  consisted  of  many  different  varieties  of  coin  and 
bank  notes.  The  most  common  silver  coin  was  the  old  Spanish 
dollar  ;  the  most  common  gold  coin,  the  English  sovereign. 
Congress  provided  that  these  should  be  legal  tender  in  propor- 
tion to  the  weight  of  pure  metal  they  contained. 

The  law  of  1792  did  not  yield  actual  bimetallism.  It  was 
soon  discovered  that  gold  had  been  undervalued  in  the  law, 
and  that  gold  coins  in  consequence  would  not  remain  in  circu- 
lation. Silver  was  the  real  standard  of  prices.  As  explained 
in  the  chapter  on  bimetallism,  it  was  impossible  for  the  United 
States  to  maintain  bimetallism  at  the  ratio  of  15  to  I  at  the 
same  time  that  France  was  freely  coining  the  two  metals  at 
15.5  to  i,  for  the  French  demand  for  gold,  combined  with  the 


342  MONEY  AND   CURRENCY 

monetary  and  industrial  demand  of  other  nations,  gave  gold  a 
market  value  above  that  of  our  coinage  ratio. 

Although  silver  was  the  monetary  standard  of  this  period, 
yet  very  few  silver  dollars  were  in  circulation.  Gresham's  law, 
operating  in  other  countries  in  a  manner  that  could  not  have 
been  foreseen,  drew  them  away  from  the  United  States.  The 
old  Spanish  dollar,  which  contained  about  seven  grains  more  of 
silver  than  ours,  was  in  general  use  in  South  America  and 
the  East  Indies.  When  our  new  silver  dollar  appeared  traders 
discovered  that  it  passed  by  tale  (that  is,  by  count)  in  the  East 
and  in  South  America  as  the  equal  of  a  Spanish  dollar.  Con- 
sequently an  opportunity  for  profit  arose  through  the  exchange 
of  American  for  Spanish  dollars.  Bullion  dealers  shipped  new 
American  dollars  to  the  Indies  and  received  in  return  an  equal 
number  of  Spanish  dollars,  which  were  sent  to  the  United 
States  Mint  for  coinage  into  American  dollars.  As  each  turn- 
over resulted  in  an  increase  of  the  number  of  American  dol- 
lars, which  in  their  turn  were  exchanged  for  Spanish  dollars, 
an  endless  chain  was  started  which  might  have  kept  in  motion 
until  the  lighter  American  coin  had  expelled  the  last  Spanish 
dollar  from  the  Orient.  In  1806,  however,  President  Jefferson 
broke  the  chain  by  the  arbitrary  suspension  of  the  free  coinage 
of  silver  dollars,  no  more  being  coined  in  this  country  until 
1836. 

Thus  it  happened  that  during  this  epoch  (1792-1834)  the 
American  people  were  forced  to  use  foreign  coins  almost  exclu- 
sively. Subsidiary  silver  units,  the  free  .coinage  of  which  was 
permitted,  were  the  only  American  coins  that  remained  in  cir- 
culation. The  inconvenience  resulting  from  the  heterogeneous 
character  of  the  currency  would  have  been  much  greater  than 
it  was  but  for  the  operation  of  the  United  States  Bank,  a 
semigovernmental  institution  chartered  by  Congress  in  1791. 
Bank  notes  constituted  the  bulk  of  the  country's  circulating 
medium.  These  were  secured  by  reserves  of  foreign  gold  and 
silver  in  the  vaults  of  banks,  and  were  redeemable  in  coin  on 
demand.  We  cannot  stop  here  to  point  out  the  beneficent 
effect  of  these  bank-note  issues.  It  is  enough  to  say  that  the 


MONEY   IN   THE  UNITED   STATES 


343 


country  at  this  time  was  saved  from  much  annoyance,  if  not 
positive  distress,  by  this  most  useful  form  of  bank  credit. 

The  War  of  1812  threw  the  country  for  a  time  into  a  state 
of  monetary  disorder.  The  charter  of  the  United  States  Bank 
expired  in  181 1,  and  was  not  renewed.  The  government,  there- 
fore, in  the  negotiation  of  loans  was  obliged  to  rely  upon  the 
assistance  of  state  banks,  and  these  institutions,  free  from  the 
controlling  influence  of  the  federal  bank,  indulged  in  a  riot  of 
speculation  which  ended  in  their  suspension  of  specie  payments 
in  1814.  The  government  itself  was  seriously  embarrassed, 
and  only  the  early  termination  of  the  war  saved  it  from  an 
issue  of  irredeemable  legal-tender  paper  money,  the  fate  of 
.which  would  undoubtedly  have  been  like  that  which  subse- 
quently befell  the  greenback.  In  1816  a  second  Bank  of  the 
United  States  was  chartered,  the  operations  of  which  brought 
the  country  back  to  a  specie  basis  in  1819. 

The  suspension  of  specie  payments  during  and  after  the  War 
of  1812  cannot  be  said  to  have  resulted  in  the  adoption  of  a 
fiat  standard.  Many  different  kinds  of  bank  notes  were  in  cir- 
culation, and  at  many  different  rates  of  discount,  but  none 
of  them  became  the  accepted  standard  of  prices.  The  metal 
standard  was  in  no  sense  abandoned  by  the  people;  it  was  ever 
present  in  their  calculations,  and  their  estimate  of  the  value 
of  a  bank  note  was  based  almost  wholly  upon  its  redemption 
prospects.  If  the  government  had  issued  legal-tender  Treasury 
notes,  it  is  quite  probable  that  these  would  have  become  the 
standard,  just  as  the  greenback  did  after  1861  ;  but  such  notes 
were  not  issued,  and  among  the  heterogeneous  mass  of  bank 
notes  no  possible  substitute  for  the  metal  standard,  possessing 
acceptability  throughout  the  entire  country,  could  be  found.1 

From  the  resumption  of  specie  payments  after  the  War  of 
1812  until  1834  the  country  was  upon  the  silver  standard, 
although  the  basis  was  nominally  bimetallic. 

1  Under  five  different  acts  of  Congress,  Treasury  notes  amounting  to  $36, 000,000 
were  issued,  but  most  of  these  bore  interest  and  none  were  legal  tender.  They 
were  utilized  by  the  banks  as  a  basis  for  note  issues,  but  as  a  medium  of  exchange 
they  had  practically  no  circulation. 


344  MONEY  AND   CURRENCY 

SECOND  BIMETALLIC  PERIOD 

233.  By  acts  of  Congress  in  1834  and  1837  the  coinage 
ratio  of  silver  and  gold  was  changed  from  15  to  I,  to  16  to  i. 
The  country,  as  a  result,  passed  from  the  silver  to  the  gold 
standard,  for  the  new  ratio  undervalued  silver  as  much  as  the 
old  ratio  had  gold.  Various  circumstances  were  responsible  for 
this  change.  Our  largest  trade  connections  at  the  time  were 
with  Great  Britain.  From  that  country,  also,  we  were  drawing 
the  capital  needed  for  the  development  of  our  natural  resources. 
The  English  sovereign  meant  a  definite  quantity  of  gold,  and 
there  was  a  growing  belief  in  this  country  that  the  financial 
and  commercial  supremacy  of  England  was  in  large  measure 
attributable  to  its  maintenance  of  the  gold  standard.  On 
account  of  our  financial  and  commercial  relations  with  England 
it  seemed  desirable  that  both  countries  should  be  upon  the 
same  money  basis.  The  discovery  of  gold  mines  in  South 
Carolina,  the  owners  of  which  wished  to  make  a  better  market 
for  gold  bullion,  also  seems  to  have  had  some  effect  upon 
Congress. 

The  change  of  ratio  was  effected  by  a  debasement  of  the 
gold  dollar,  the  amount  of  pure  gold  in  it  being  reduced  from 
24.75  to  23.22  grains.  This  change,  it  will  be  seen,  made  the 
silver  dollar  of  371.25  grains  16  times  heavier  than  the  gold 
dollar.1  At  the  same  time  the  present  standard  of  fineness 
(nine  tenths)  was  adopted  for  both  gold  and  silver  coins. 

This  debasement  of  the  gold  coins  by  6  per  cent  did  not 
mean  a  corresponding  debasement  of  the  standard.  Just  prior 
to  the  change  of  ratio  in  1834  the  prices  of  goods  represented 
the  purchasing  power  of  371.25  grains  of  pure  silver.  In  the 
current  silver  money  24.75  grains  of  pure  gold  were  worth 
$1.03,  a  rate  of  exchange  which  made  23.22  grains  of  pure  gold 
(the  new  gold  dollar)  equal  to  about  97  cents  in  silver.  The 
real  depreciation  of  the  standard,  therefore,  was  only  about  3 
per  cent.  Logically  this  should  have  caused  a  corresponding 
rise  in  the  prices  of  commodities,  but  as  a  matter  of  fact  its 

1  The  exact  ratio  is  15.9884  to  i. 


MONEY   IN   THE  UNITED   STATES 


345 


effect  was  not  noticeable.  This  is  explained  by  the  fact  that 
gold  and  silver  were  steadily  increasing  in  value  at  the  time, 
the  annual  output  of  the  world's  mines  being  very  small,  so 
that  the  3  per  cent  depreciation  of  the  dollar,  instead  of  caus- 
ing a  rise  of  prices,  merely  checked  for  a  time  the  downward 
tendency. 

The  monetary  system  established  by  the  legislation  of  1834- 
1837  continued  in  force  until  1861,  gold  throughout  this  period 
being  the  real  standard  of  prices.  The  country  soon  possessed 
an  abundance  of  gold  coin.  Silver  dollars  were  coined  to  some 
extent,  but  most  of  them  were  melted  or  exported. 

234.  The  new  situation  was  not  without  its  inconveniences. 
-Not  only  were  silver  dollars  worth  more  as  bullion  than  as  coin, 
but  all  the  smaller  silver  coins  likewise  had  a  higher  value  as 
bullion  than  as  money.  Under  the  law  of  1792  two  silver  half 
dollars,  four  quarters,  or  ten  dimes  contained  as  much  silver  as 
a  dollar.  As  the  law  of  1834  made  no  change  in  the  constituent 
elements  of  subsidiary  coins,  it  became  profitable  to  export  all 
of  these  that  were  full  weight.  Thus  a  scarcity  of  small  change 
arose,  only  worn  and  light-weight  coins  remaining  in  circulation. 
In  order  to  remedy  this  state  of  affairs  Congress  in  1853  passed 
a  law  changing  the  character  of  subsidiary  silver  coins.  Before 
this  date  the  free  coinage  of  these  had  been  permitted,  and  they 
had  possessed  full  legal-tender  power,  creditors  being  obliged 
to  accept  them  to  any  amount.  By  the  act  of  1853  the  amount 
of  metal  in  all  fractional  silver  coins  was  reduced  about  7^  per 
cent,  the  half  dollar  being  reduced  from  185.625  grains  pure 
silver  to  172.8  grains,  and  smaller  coins  in  the  same  proportion. 
The  law  also  provided  that  these  coins  should  be  minted  only 
on  government  account,  freedom  of  coinage  being  thus  sus- 
pended ;  and  that  they  should  be  legal  tender  for  not  more 
than  $5.00.  This  change  made  the  ratio  between  silver  and  gold 
14.88  to  i,  whereas  the  market  ratio  at  the  time  was  15.23  to  i. 
The  law  accomplished  the  purpose  desired.  As  small  silver 
coins  thereafter  possessed  a  value  as  money  in  excess  of  their 
value  as  bullion,  it  was  unprofitable  to  melt  or  export  them. 
The  fractional  silver  now  in  use  is  of  the  weight  and  fineness 


346  MONEY  AND  CURRENCY 

provided  by  the  act  of  1853.  Prior  to  1853  subsidiary  silver 
coins  were  standard  money ;  since  that  date  they  have  been 
mere  credit  or  token  money. 

As  a  result  of  the  act  of  1853  the  United  States,  for  the  first 
time  in  its  history,  was  supplied  with  an  abundance  of  small 
silver  coins  of  its  own  minting.  Accordingly  in  1857  Congress 
repealed  all  laws  giving  a  legal-tender  quality  to  foreign  silver 
coins. 

LAW  OF  1873 

235.  The  next  change  in  our  coinage  law  was  made  in  1873. 
At  this  time,  as  already  shown,  the  country  was  upon  a  fiat- 
money  basis,  but  the  dominant  sentiment  favored  a  return  to 
specie  payment ;  and  since  all  the  business  of  the  country  had 
been  done  upon  a  gold  basis  for  two  generations,  few  silver 
dollars  having  been  in  circulation,  a  rather  strong  sentiment 
in  favor  of  the  gold  standard  existed.  The  question  of  stand- 
ards excited  little  popular  interest  in  this  country,  but  in 
Europe  it  had  been  for  some  time  a  matter  of  general  dis- 
cussion. At  an  international  monetary  conference  in  Paris  in 
1867,  held  ostensibly  for  the  purpose  of  securing  monetary 
uniformity  among  the  leading  nations  of  the  world,  bimetallism 
had  proved  a  stumbling-block,  the  prevailing  opinion  being  in 
favor  of  the  single  gold  standard.  Accordingly  no  opposition 
was  excited  in  this  country  when  our  Secretary  of  the  Treasury 
presented  to  Congress  a  bill  for  the  revision  of  our  coinage 
laws,  in  which  all  silver  coins  were  made  legal  tender  for  only 
$5.00,  the  monetary  unit  being  declared  to  be  the  gold  dol- 
lar of  23.22  grains  fine.  The  bill  was  prepared  by  Mr.  John 
J.  Knox,  Comptroller  of  the  Currency,  and  sent  to  Congress  in 
1870.  By  most  congressmen  and  by  the  public  generally  it 
was  regarded  merely  as  a  revision  or  codification  of  existing 
coinage  laws.  Gold  was  not  the  money  of  the  time.  People 
were  buying  and  selling  goods  with  greenbacks,  and  the  aver- 
age man  was  interested  only  in  legislation  which  affected 
the  standing  of  the  greenback.  The  bill,  therefore,  although 
the  subject  of  some  debate  in  Congress,  aroused  no  general 


MONEY   IN   THE   UNITED   STATES  347 

interest  and  passed  both  houses  practically  without  opposition, 
becoming  a  law  February  12,  1873.  The  law  as  passed  made 
no  mention  whatever  of  the  silver  dollar  ;  instead  of  specifically 
prohibiting  its  free  coinage,  the  law  simply  failed  to  include 
it  among  the  coins  which  might  be  minted.  Thus  the  United 
States  from  a  condition  of  legal  bimetallism  passed  to  a  condi- 
tion of  legal  monometallism,  which  became  actual  in  1879. 

236.  The  act  of  1873,  although  it  suspended  the  free  coin- 
age of  a  legal-tender  silver  dollar,  provided  for  the  free  coinage 
of  a  silver  coin  known  as  the  "  trade  dollar,"  to  contain  420 
grains  of  standard  silver  and  to  be  legal  tender  for  $5.00.  This 
dollar  was  intended  for  use  in  our  trade  with  the  Orient,  and 
was  worth  at  the  time  about  four  cents  more  than  a  gold  dollar. 
The  decline  in  the  gold  price  of  silver,  which  began  in  1873, 
produced  results  not  contemplated  by  the  framers  of  the  act, 
for  the   conversion   of   silver  bullion   into   trade  dollars   soon 
became  a  profitable  business.    Instead  of  going  to  the  Orient, 
they  remained  at  home,  people  being  compelled  to  accept  them 
in  payments  not  exceeding  $5.00.    In  1876  Congress  deprived 
them  altogether  of  their  legal-tender  quality  and  gaye  the  Secre- 
tary of  the  Treasury  authority  to  restrict  their  coinage.    In  1887 
Congress  provided  for  their  redemption  at  par  in  standard  silver 
dollars.  The  total  coinage  was  $36,000,000,  but  only  $7,700,000 
were  presented  for  redemption. 

" LIMPING  STANDARD"  (1879-1890) 

237.  Under  the  terms  of  the  coinage  act  of   1873,  which 
made  the  gold  dollar  the  unit  of  price  in  the  United  States,  the 
resumption  of  specie  payments  in  1879  meant  the  adoption  of 
the  single  gold  standard.    The  word  "  dollar  "  thereafter  was  to 
mean  25.8  grains  of  standard  gold,  and  under  the  law  the  word 
"specie"  could  be  interpreted  only  as  meaning  gold.    Silver 
was  no  longer  a  money  metal,  and  no  silver  dollars  were  to 
be  coined. 

In  1878,  however,  a  few  months  before  the  resumption  of 
specie  payments,  Congress  passed  a  bill,  commonly  known  as 


348  MONEY  AND   CURRENCY 

the  Bland-Allison  Act,  which  threw  some  doubt  upon  the 
nature  of  our  monetary  unit.  This  act,  which  was  a  compromise 
with  the  advocates  of  the  free  coinage  of  silver,  provided  for 
the  monthly  purchase  of  between  $2,000,000  and  $4,000,000 
worth  of  silver  bullion,  and  its  coinage  into  dollars  of  412^ 
grains  standard.  In  the  act  these  dollars  were  called  "  standard 
silver  dollars,"  and  were  declared  legal  tender  for  all  debts, 
public  and  private,  principal  and  interest  of  government  bonds 
excepted.  The  law  remained  in  force  until  July  14,  1890,  the 
total  coinage  of  silver  dollars  amounting  to  $378,166,793.  For 
the  first  time  in  the  country's  history  there  was  an  abundance 
of  silver  dollars  in  circulation.  Indeed,  after  a  few  years  it  was 
found  impossible  to  get  the  fresh  supplies  into  circulation,  the 
country's  need  for  currency  in  the  form  of  a  silver  dollar  being 
satisfied  during  the  eighties  with  less  than  $60,000,000. 

238.  The  Bland- Allison  silver  dollar  was  a  monetary  anom- 
aly. Although  called  a  standard  silver  dollar  to  propitiate  the 
friends  of  silver,  it  was  in  no  sense  standard  money ;  nor  was 
it  recognized  as  credit  money,  for  no  provision  whatever  was 
made  for  its  redemption  in  gold.  Its  status  was  very  much  like 
that  of  the  Indian  rupee  after  1898,  —  theoretically  and  legally 
fiat  money,  susceptible  of  depreciation  if  issued  to  excess ;  but 
practically  credit  money,  the  people  having  confidence  that 
somehow  it  would  be  kept  at  par  with  gold.  Inasmuch  as  the 
law  made  it  legal  tender,  the  people  certainly  had  a  right  to 
expect  that  the  government  would  keep  it  equal  in  value  to 
gold.  There  was  no  direct  promise  to  pay  gold,  but  the  im- 
plied obligation  was  tantamount  to  an  explicit  declaration.  Two 
things  were  essential  to  the  maintenance  of  its  value  :  first, 
limitation  of  the  supply ;  and  second,  confidence  among  the 
people  in  the  purpose  and  ability  of  the  government  to  prevent 
its  depreciation.  These  two  conditions  were  necessarily  inter- 
twined. Theoretically  the  supply  of  silver  dollars  might  increase 
until  all  the  country's  gold  had  been  displaced,  and  no  deprecia- 
tion result,  for  there  would  be  no  increase  in  the  supply  of  cur- 
rency ;  but  such  an  increase  would  have  destroyed  confidence 
in  the  ability  of  the  government  to  redeem  silver  dollars,  and  so 


MONEY    IN    THE   UNITED    STATES  349 

would  have  led  to  depreciation,  the  country  thereby  passing  from 
a  gold  standard  to  a  fiat  standard. 

Our  monetary  system  at  this  time,  being  neither  bimetallic 
nor  explicitly  monometallic,  was  said  to  be  upon  a  "  limping 
standard."  This  expression  was  borrowed  from  Germany, 
which  at  the  time  was  in  a  similar  position.  When  Germany 
adopted  the  gold  standard  in  1871,  with  the  mark  as  the  mone- 
tary unit,  some  300,000,000  silver  thalers  were  in  existence. 
Over  one  half  of  these  were  sold  as  bullion  before  1879,  when 
sales  were  suspended  on  account  of  the  decline  in  silver.  Over 
100,000,000  are  still  in  existence  and  have  legal-tender  power  as 
the  equivalent  of  three  marks,  although  not  legally  redeemable. 
France  also  had,  and  still  has,  the  "limping  standard."  The 
silver  five-franc  pieces  are  legal  tender  for  all  debts,  but  are  not 
legally  redeemable  in  gold.  The  Bank  of  France  has  the  right 
to  pay  them  out  in  redemption  of  its  notes.  Nevertheless,  in 
France,  as  in  Germany,  gold  is  the  real  standard  of  prices.  The 
United  States,  as  we  shall  see  later,  has  definitely,  by  legal 
enactment,  placed  itself  upon  a  gold  basis,  but  Germany  and 
France  are  still,  theoretically,  on  the  "limping  standard." 

239.  The  act  of  1878  failed  to  accomplish  any  of  the  pur- 
poses desired  by  the  friends  of  silver.  It  did  not  increase  the 
money  supply,  it  had  little  effect  on  the  value  of  silver,  and 
it  did  not  check  the  fall  of  prices.  The  notion  that  it  would 
increase  the  money  supply  seems  to  have  been  commonly  held, 
yet  any  such  effect  was  impossible  so  long  as  any  gold  coin 
remained  in  circulation.  Every  silver  dollar  put  into  circulation 
after  1878  merely  took  the  place  that  would  have  been  filled  by 
a  gold  dollar  had  no  silver  dollars  been  coined.  The  demand 
for  currency  in  the  United  States  greatly  increased  between 
1878  and  1890.  If  this  demand  had  not  been  met  by  the  coin- 
age of  378,000,000  silver  dollars,  gold  would  have  been  im- 
ported in  larger  quantities,  and  in  place  of  an  abundance  of 
silver  we  should  have  had  an  abundance  of  gold.  Our  exports 
of  merchandise  would  have  been  larger,  and  possibly  our  im- 
ports might  have  been  smaller.  The  gold  standard,  in  short, 
would  have  been  firmly  established.  The  law  of  1878  made  our 


350  MONEY  AND   CURRENCY 

supply  of  money  —  that  is,  gold  —  less  than  it  otherwise  would 
have  been,  and  had  very  little  effect  upon  the  total  supply  of 
currency. 

Nor  did  this  law  of  1878  affect  the  value  of  silver  bullion  as 
a  free  coinage  act  would  have  done.  It  was  in  no  sense  a 
remonetization  of  silver.  It  gave  to  the  metal  no  money  utility 
and  did  not  increase  the  general  demand  for  it.  Free  coin- 
age would  have  done  that,  but  the  limited  coinage  of  silver 
dollars,  which  merely  made  the  metal  the  material  for  credit 
money,  tended  to  raise  its  value  only  in  so  far  as  it  reduced 
the  available  market  supply.  The  gold  price  of  silver  in  1878 
was  $1.15.  It  averaged  4  cents  lower  in  1879,  then  rose  to 
$1.14  in  1880,  and  thereafter  declined  steadily  to  93  cents  in 
1889.  This  decline  of  the  gold  price,  as  shown  in  a  previous 
chapter,  was  due  to  a  rise  in  the  value  of  gold  rather  than  to 
a  fall  in  the  value  of  silver. 

There  was  a  popular  notion  that  the  Bland-Allison  Act,  by 
increasing  the  supply  of  "money,"  would  check  the  downward 
tendency  of  prices.  This  idea  had  no  foundation  in  reason.  As 
we  have  seen,  the  act  could  not  have  led  to  an  increase  in  the 
supply  either  of  money  or  of  other  currency  so  long  as  gold 
remained  the  standard.  Prices  varied  inversely  with  the  value 
of  gold,  and  that  was  fixed  by  world  forces  upon  which  an  act 
of  Congress  could  exert  very  little  influence.  The  coinage  of 
$30,000,000  in  silver  every  year  lessened  this  country's  need 
for  gold  by  that  amount  and  so  was  a  credit  influence  tending 
to  cheapen  gold  and  raise  prices ;  but  it  was  slight  and  in- 
effective in  comparison  with  all  the  world  influences  acting 
upon  the  demand  for  and  supply  of  gold. 

240.  The  opponents  of  the  act  of  1878  predicted  dire  con- 
sequences, —  inflation,  gold  exports,  panic,  and  a  change  to  the 
silver  standard.  Fortunately,  however,  the  coinage  of  Bland- 
Allison  dollars  was  begun  at  a  time  when  the  need  for  currency 
was  greatly  increasing,  and  the  predicted  evils  did  not  material- 
ize. The  year  1879  marked  the  end  of  the  depression  following 
the  panic  of  1873,  and  the  beginning  of  a  period  of  great  indus- 
trial activity.  During  the  next  eleven  years  eighty  thousand 


MONEY   IN  THE  UNITED   STATES  351 

miles  of  new  railroad  doubled  the  country's  mileage.  Despite 
the  monthly  outflow  of  silver  dollars  from  the  United  States 
Mint,  the  demand  for  currency  easily  absorbed  them  all,  and,  in 
addition,  led  to  large  imports  of  gold.  During  the  ten  years  fol- 
lowing 1878  the  net  imports  of  gold  into  this  country  amounted 
to  $224,000,000.  In  only  two  years,  1884  and  1886,  were  the 
exports  in  excess  of  the  imports.  At  the  same  time  this  coun- 
try was  producing  annually  about  $60,000,000  worth  of  gold, 
of  which  at  least  80  per  cent  was  added  to  the  money  supply. 
According  to  estimates  made  by  the  Director  of  the  Mint,  the 
monetary  stock  of  gold  in  the  United  States  increased  from 
$230,000,000  in  1879  to  $690,000,000  in  1890.  During  the 
same  period  378,000,000  new  silver  dollars  were  coined.  This 
growth  in  the  monetary  stock  was  offset  to  some  extent  by  a 
decline  in  the  quantity  of  national  bank  notes  from  $323,000,- 
ooo  in  1878  to  $186,000,000  in  1890,  the  improved  credit  of  the 
nation  having  raised  the  prices  of  government  bonds  to  fig- 
ures which  tempted  the  banks  to  reduce  their  circulation  to  the 
lowest  possible  limits.  The  net  increase  of  the  currency  in  circu- 
lation between  1878  and  1890  was  about  $600,000,000,  or  nearly 
80  per  cent. 

241.  All  this  addition  to  the  country's  monetary  stock  was 
absorbed  by  the  increasing  demand  for  currency,  but  not  with- 
out difficulty.  It  was  very  soon  discovered  that  the  public  had 
no  use  for  silver  dollars  beyond  a  limited  amount.1  The  law 
of  1878  had  provided  for  the  issue  of  silver  certificates  against 
the  deposit  of  silver  dollars,  no  certificate  to  be  of  a  denomina- 
tion under  $10.  Of  these  certificates  $88,000,000  were  in  cir- 
culation in  1886,  but  they  were  not  very  much  liked  by  the 
banks,  for  according  to  the  law  of  July  12,  1882,  they  were  not 
legal  tender,  although  they  were  receivable  in  payment  of  all 
dues  to  the  government  and  could  be  counted  by  national  banks 
as  part  of  their  "lawful  money"  reserves. 

In  order  to  popularize  silver  certificates  Congress  provided 
by  act  of  August  4,  1886,  for  their  issue  in  denominations  of 

1  In  1884  only  40,000,000  silver  dollars  were  in  circulation.  By  1901  the  num- 
ber had  increased  to  70,000,000. 


352  MONEY  AND   CURRENCY 

$1.00,  $2.00,  and  $5.00.  As  the  national  banks  were  not  allowed 
to  issue  bank  notes  of  small  denominations,  and  as  the  Secretary 
of  the  Treasury  adopted  the  policy  of  retaining  all  greenbacks  of 
small  denominations,  the  silver  certificate  necessarily  became 
the  pocket  money  of  the  people,  and  their  volume  rapidly  in- 
creased, rising  to  $142,000,000  in  1887  and  $297,000,000  in 
1890.  These  certificates  are  promises  to  pay  silver  dollars  to 
the  bearer,  and  are  issued  only  against  the  deposit  of  silver  dol- 
lars. Only  by  their  issue  was  the  government  able  to  utilize 
the  silver  dollars  coined  under  the  act  of  1878. 

242.  The  act  of  1878  necessarily  resulted  in  the  coinage 
of  more,  than  2,000,000  dollars  per  month.  It  required  the 
purchase  of  at  least  $2,000,000  worth  of  silver ;  and  since 
the  price  of  this  metal  throughout  this  period  was  less  than 
$1.29  per  ounce,  $2,000,000  worth  was  sufficient  to  coin  con- 
siderably more  than  2,000,000  dollars.1  In  1883,  for  example, 
the  average  price  of  silver  per  ounce  was  $i.n.  At  this  price 
the  government  with  $2,000,000  could  buy  enough  silver  to 
make  2,325,000  dollars.  The  apparent  profit  made  has  been 
improperly  called  a  seigniorage.  The  total  cost  of  the  silver 
bullion  purchased  under  the  act  of  1878  was  '$308,000,000. 
It  amounted  to  291,000,000  ounces,  or  sufficient  to  coin  $378,- 
000,000.  The  so-called  profit,  or  seigniorage,  therefore,  was 
$70,000,000.  This  sum,  however,  was  not  a  profit  or  gain,  and 
cannot  properly  be  called  a  seigniorage.  This  latter  word  is 
applicable  only  in  the  case  of  a  metal  freely  coined,  when  it 
implies  the  assumption  of  no  debt  or  obligation  on  the  part  of 
the  government.  These  silver  dollars  constitute  a  government 
debt  as  truly  as  does  the  greenback.  In  1890  the  government 
was  under  obligation  to  maintain  at  par  with  gold  378,000,000 
silver  dollars,  just  as  it  was  to  maintain  the  parity  of  $346,000,- 
ooo  in  greenbacks.  Both  .were  government  debts,  the  only  dif- 
ference being  that  in  the  case  of  one  the  promise  to  pay  was 
expressed,  while  in  the  other  it  was  implied.  In  1890  the 
value  of  the  bullion  contained  in  the  silver  dollars,  the  market 

1  No  Secretary  of  the  Treasury  ever  bought  more  than  the  minimum  amount 
prescribed  by  the  law. 


MONEY   IN  THE  UNITED   STATES  353 

price  of  silver  being  $1.04,  was  $302,000,000.  If  it  is  granted 
that  the  government  could  have  sold  this  bullion  at  the  market 
price,  although  such  a  sale  could  not  have  been  made,  the 
government's  net  debt  on  account  of  these  silver  dollars  was 
at  that  time  $76,000,000.  At  the  price  of  silver  prevailing  in 
1903  (about  53  cents),  the  government's  net  debt  on  account  of 
the  378,000,000  Bland-Allison  dollars  was  about  $225,000,000. 
It  is  evidently  wrong  to  speak  of  the  difference  between  the 
bullion  and  the  coinage  value  of  silver  dollars  as  a  profit. 

243.  Before  describing  the  legislation  of  1890  let  us  briefly 
analyze  the  monetary  system  of  the  United  States  as  it  existed 
in  the  beginning  of  that  year.  The  supply  of  currency  or 
"money,"  as  estimated  by  the  Secretary  of  the  Treasury,  was 
as  follows  : 

Gold  coin  and  bullion $695,000,000 

Silver  dollars 386,000,000 

Subsidiary  silver 76,000,000 

National  bank  notes 186,000,000 

Greenbacks 347,000,000 

Total $1,690,000,000 


Of  the  gold,  $177,000,000  belonged  to  the  Treasury  and  was 
known  as  "  free  gold,"  to  distinguish  it  from  the  gold  which 
had  been  deposited  in  the  Treasury  against  the  issue  of  gold 
certificates.  This  free  gold  was  known  as  the  "  gold  reserve  " 
for  the  redemption  of  greenbacks.  No  law  prescribed  a  mini- 
mum below  which  this  reserve  must  not  fall,  but  custom  had* 
fixed  the  figure  at  $100,000,000.  The  only  law  in  any  way 
referring  to  the  matter  was  passed  in  1882;  it  directed  the 
Secretary  to  suspend  the  issue  of  gold  certificates  when  the 
free  gold  in  the  Treasury  fell  below  $100,000,000.  Thus  Con- 
gress expressed  its  opinion  that  the  gold  reserve  should  not 
be  less  than  $100,000,000.  Gold  certificates,  the  issue  of  which 
against  deposits  of  gold  was  authorized  by  act  of  Congress 
in  1863,  were  a  convenient  paper  representative  of  gold,  a  sort 
of  warehouse  receipt.  They  were  popular  with  bankers,  being 
more  easily  stored  and  counted  in  banking  reserves  than  gold 


354  MONEY  AND   CURRENCY 

coin.  A  suspension  of  their  issue,  it  was  hoped,  would  lead  to 
a  larger  use  of  greenbacks  by  bankers,  so  that  fewer  of  these 
would  be  taken  to  the  Treasury  for  redemption.  The  vicissi- 
tudes of  this  gold  reserve  became,  as  we  shall  see,  a  very  impor- 
tant matter  before  the  end  of  the  century. 

Of  the  386,000,000  silver  dollars,  8,000,000  had  been  coined 
out  of  the  old  " trade  dollars"  and  378,000,000  out  of  silver 
bought  under  the  act  of  1878.  These  silver  dollars  were  not 
redeemable  in  gold.  The  law  declared  them  standard  dollars. 

The  national  bank  notes  were  redeemable  in  "  lawful  money," 
which  included  greenbacks,  silver  and  silver  certificates,  and 
gold  and  gold  certificates.  The  bank  notes  were  secured  by 
government  bonds  deposited  at  the  Treasury,  a  national  bank 
being  then  permitted  to  issue  notes  equal  in  amount  to  90 
per  cent  of  the  par  value  of  the  bonds  it  deposited. 

SHERMAN  ACT  OF  1890 

244.  The  nonfulfillment  of  the  pessimistic  prophecies  of  the 
gold  or  so-called  "sound  money"  men  encouraged  the  friends 
of  silver  to  demand  more  legislation,  and  in  1890  (July  14)  a 
second  silver-purchase  law  was  enacted.  Like  the  act  of  1878, 
this  was  a  compromise  between  the  "  sound  money "  men 
and  the  advocates  of  free  coinage.  It  is  generally  known  as 
the  Sherman  Act,  John  Sherman  having  been  chairman  of  the 
Senate  committee  by  which  it  was  drafted.  It  ordered  the  Sec- 
retary of  the  Treasury  to  purchase  monthly  4,500,000  ounces 
of  silver  at  the  market  price,  and  to  pay  therefor  by  the  issue 
of  new  Treasury  notes,  legal  tender  and  redeemable  in  coin ; 
the  purchases  to  cease  whenever  the  market  price  equaled 
$1.29  per  ounce,  the  price  at  which  the  ratio  of  silver  to  gold  is 
1 6  to  i.  The  silver  bullion  purchased  was  to  be  stored  in  the 
Treasury  as  a  sort  of  reserve  or  security  for  Treasury  notes. 
This  act  remained  in  force  until  July,  1893,  and  under  it  the 
government  purchased  169,000,000  ounces  of  silver  at  a  cost  of 
$156,000,000.  It  provided  for  the  coinage  of  2,000,000  ounces 
of  silver  per  month  until  July  i,  1891,  and  for  such  further 


MONEY   IN  THE  UNITED    STATES 


355 


coinage  thereafter  as  might  be  necessary  for  the  redemption  of 
the  Treasury  notes. 

The  new  Treasury  notes  were  made  redeemable  on  demand 
in  either  gold  or  silver  coin,  at  the  discretion  of  the  Secretary 
of  the  Treasury.  To  increase  their  acceptability  the  following 
important  clause  was  inserted  : 

...  it  being  the  established  policy  of  the  United  States  to  maintain 
the  two  metals  on  a  parity  with  each  other  upon  the  present  legal  ratio,  or 
such  ratio  as  may  be  provided  by  law. 

This  so-called  "parity  clause"  was  the  first  legislative  recog- 
nition of  the  silver  dollar  as  credit  money  for  the  value  of  which 
the  government  was  responsible.  The  act  as  a  whole  threat- 
ened the  subversion  of  the  gold  standard  ;  yet  this  parity  clause 
was  an  important  move  toward  the  more  secure  establishment 
of  that  standard.  In  the  troublous  times  that  followed  no 
Secretary  refused  to  redeem  the  Sherman  notes  in  gold.  They 
were  treated  as  the  equal  of  greenbacks. 

245.  The  Sherman  Act  was  confidently  expected  to  "do 
something"  for  silver,  for  the  purchases  it  ordered  would 
absorb  nearly  the  whole  silver  output  of  the  United  States. 
These  expectations  were  doomed  to  disappointment.  There 
was  a  brief  speculative  boom  in  silver  in  1890,  the  price  rising 
from  $1.04  per  ounce  July  i  to  $1.21  September  3  ;  but  then 
it  steadily  declined,  the  average  price  in  1891  being  98  cents 
and  in  1892  87  cents. 

It  was  also  expected  that  the  Sherman  Act  would  exert  a 
beneficial  influence  upon  business  and  industry.  It  seemed  to 
promise  more  money,  high  prices,  better  times.  Mr.  Windom, 
Secretary  of  the  Treasury,  expressed  a  quite  common  opinion 
when  he  wrote  in  his  annual  report  for  1890:  "One  thing  is 
certain,  that  it  has  been  the  means  of  providing  a  healthy  and 
much-needed  addition  to  the  circulating  medium  of  the  United 
States." 

The  act,  however,  soon  brought  disaster.  During  the  next 
three  years  $156,000,000  new  credit  money  was  issued,  but 
events  showed  that  it  was  not  needed,  for  an  equal  amount  of 


356  MONEY  AND   CURRENCY 

gold  was  crowded  out  of  circulation  and  exported  to  foreign 
countries.  During  the  first  six  months  of  1891  our  gold  exports 
amounted  to  $74,000,000.  The  bountiful  harvests  of  that  year, 
resulting  in  large  exports  of  grain,  turned  the  foreign  exchanges 
in  our  favor  during  the  latter  half  of  the  year,  but  in  1892 
gold  exports  were  renewed  and  the  amount  of  free  gold  in  the 
Treasury  rapidly  declined.  By  April,  1893,  the  gold  reserve 
had  dwindled  to  $97,000,000.  The  situation  gave  rise  to  much 
alarm  among  business  men,  for  the  fear  was  felt  that  the  gov- 
ernment might  not  be  able  to  continue  the  redemption  of  the 
greenbacks  and  Sherman  notes.  This  fear,  which  was  felt  in 
Europe  as  well  as  in  the  United  States,  precipitated  the  disas- 
trous panic  of  1893.  In  the  midst  of  that  panic  President 
Cleveland  called  a  special  session  of  Congress.  It  met  August  7, 
and  after  much  debate  in  the  Senate  a  bill  was  passed  (Octo- 
ber 30)  repealing  the  silver-purchase  provisions  of  the  Sherman 
Act.  The  parity  clause  was  not  repealed,  but  was  reiterated 
with  emphasis,  although  linked  with  a  declaration  in  favor  of 
international  bimetallism. 

246.  The  evil  effects  of  the  Sherman  Act,  and  of  the  result- 
ing inflation,  did  not  end  with  the  panic  of  1893.  During  the 
next  three  years  the  industries  of  this  country  were  numb, 
as  with  paralysis,  and  the  demand  for  money  was  in  conse- 
quence greatly  reduced.  Redundant  cash,  accumulating  in  the 
vaults  of  the  city  banks,  stimulated  unhealthy  speculation  in  our 
stock  and  produce  markets,  and  thus,  by  raising  our  price  level 
above  that  of  Europe,  caused  a  steady  export  movement  of  gold. 
The  operations  of  the  Treasury,  from  which  the  gold  was  taken, 
tended  to  accelerate  the  movement,  for  its  receipts  from  cus- 
toms and  internal  revenue  were  less  than  its  expenditures.  The 
Secretary  of  the  Treasury,  although  embarrassed  by  the  infla- 
tion of  the  currency,  was  himself  obliged  to  contribute  to  it, 
for  the  situation  compelled  him  each  month  to  pay  out  more 
currency  than  he  took  in.  In  January,  1894,  the  gold  reserve 
had  shrunk  to  $65,000,000,  and  the  total  cash  balance  of  the 
Treasury,  including  this  gold  reserve,  amounted  to  only  $84,- 
000,000.  The  Secretary  of  the  Treasury  appealed  to  Congress 


MONEY  IN   THE  UNITED   STATES  357 

for  power  to  issue  bonds,  but  Congress  declined  to  give  assist- 
ance. Accordingly,  under  authority  conferred  by  the  Resump- 
tion Act  of  1875,  the  Secretary  of  the  Treasury,  in  January, 

1894,  advertised  for  sale  $50,000,000  5   per  cent  bonds  ma- 
turing in  ten  years.    The  price  was  fixed   at   117.223,  which 
made  the  interest  rate  equal  to  3  per  cent.    The  bonds  were 
taken  mainly  by  the  banks  of  New  York  City,  the  proceeds 
amounting   to    $58,189,500.    The    gold    reserve   was    thereby 
raised    to   $107,000,000. 

This  bond  issue,  however,  could  not  counteract  the  forces 
that  were  compelling  the  exportation  of  gold.  On  account  of 
the  deficit  the  Treasury  continued  to  inflate  the  currency; 
gold  exports  were  continued,  and  the  Treasury  gold  holdings 
rapidly  reduced.  In  August  the  gold  reserve  amounted  to 
only  $52,000,000.  A  second  bond  issue  for  $50,000,000,  sold 
at  117.077,  brought  the  gold  reserve  up  to  $105,000,000  in 
November.  This  issue  had  a  bad  effect  upon  the  public,  giving 
rise  to  the  impression  that  the  Treasury  was  in  distress  and 
might  not  be  able  to  maintain  gold  payments.  As  a  result 
timorous  people  began  to  withdraw  gold  from  the  Treasury  by 
the  redemption  of  greenbacks,  not  because  they  needed  gold 
for  export,  but  because  they  feared  national  bankruptcy.  In 
the  last  three  months  of  1894  the  Treasury  lost  $80,000,000 
in  gold,  although  less  than  half  this  sum  was  exported. 

In  January,  1895,  the  reserve  having  shrunk  to  $44,700,000, 
the  Secretary  arranged  for  a  third  issue  of  bonds.  The  previous 
issues  had  been  sold  after  public  advertisement.  The  third  issue, 
however,  was  made  under  a  forgotten  clause  of  the  Revised 
Statutes  (Section  3700),  which  gave  the  Secretary  authority  to 
sell  bonds  upon  such  terms  as  he  should  deem  most  advan- 
tageous to  the  public  interest.  Under  this  section,  in  January, 

1895,  he  entered  into  a  contract  with  a  syndicate  of  bankers, 
according  to  the  terms  of  which  it  was  agreed:  (i)  that  the 
syndicate  should  deliver  $65, 1 1 7,500  in  gold  (3,500,000  ounces) ; 
(2)  that  one  half  of  this  gold  should  be  brought  from  Europe 
at  the  rate  of   300,000  ounces  per  month  ;    (3)  that  for  six 
months  the  syndicate  should  use  all  its  influence  to  prevent 


358  MONEY  AND   CURRENCY 

the  withdrawal  of  gold  from  the  Treasury;  (4)  that  the  gold 
should  be  paid  for  with  4  per  cent  thirty-year  bonds  at  104.49. 
The  low  price  paid  for  the  bonds  has  subjected  this  contract 
to  much  criticism,  but  the  contract  appears  to  have  been  jus- 
tified by  the  exigency.  The  syndicate  accomplished  all  that 
was  asked  of  it.  Through  the  cooperation  of  foreign  bankers, 
who  were  interested  in  the  syndicate,  the  rate  of  foreign  ex- 
change was  for  six  months  kept  below  the  gold  export  point, 
the  gold  reserve  of  the  Treasury  was  raised  above  $100,000,000, 
the  exportation  of  gold  ceased  for  several  months,  and  public 
alarm  was  quieted. 

The  syndicate  was  not  held  to  its  agreement  to  import 
part  of  the  gold.  This  was  wise,  for  the  real  though  not  osten- 
sible purpose  of  the  bond  issue  was  to  contract  the  supply  of 
currency  in  this  country;  if  the  syndicate  had  imported  the 
gold  from  Europe  and  paid  it  over  to  the  Treasury,  no  con- 
traction of  our  money  supply  would  have  resulted,  and  there 
would  have  been  strong  pressure  for  the  reexportation  of  the 
metal. 

Gold  exports  were  not  resumed  until  August,  1895,  and  by 
December  the  gold  reserve  had  fallen  to  $79,000,000.  In  this 
month  President  Cleveland's  message  regarding  the  boundary 
line  between  Venezuela  and  British  Guiana,  which  seemed 
to  breathe  a  threat  of  war  against  Great  Britain,  threw  Wall 
Street  into  a  panic,  and  large  withdrawals  of  gold  from  the 
Treasury  ensued.  In  January,  1896,  the  gold  reserve  having 
fallen  to  $49,000,000,  the  Secretary  of  the  Treasury  sold  $100,- 
000,000  4  per  cent  thirty-year  bonds  at  an  average  price  of 
1 1 1. 1 66.  Exports  of  gold  did  not  cease  until  August,  but  the 
reserve  did  not  again  fall  below  $100,000,000. 

A  summary  review  of  the  events  following  the  passage  of  the 
Sherman  Act  in  1890  will  be  found  instructive.  The  act  led 
to  the  issue  of  $156,000,000  new  Treasury  notes  within  three 
years,  and  to  the  exportation  of  $160,000,000  worth  of  gold  in 
the  same  period.  In  1893,  therefore,  the  country  held  at  least 
$150,000,000  less  gold  than  it  would  have  had  if  the  Sherman 
Act  had  not  been  passed ;  the  gold  reserve,  while  the  act  was 


MONEY   IN  THE  UNITED   STATES 


359 


in  force,  declined  from  $184,000,000  to  $84,000,000  (October, 
1893).  The  depression  following  the  panic  of  1893  was  accom- 
panied by  a  shrinkage  in  the  need  for  currency,  while  at  the 
same  time  continuous  inflation  was  resulting  from  the  Treasury 
deficit,  the  excess  of  expenditures  from  July  I,  1893,  to  Decem- 
ber i,  1895,  amounting  to  $130,000,000.  Continuous  inflation 
gave  rise  to  a  continuous  demand  for  gold  for  export.  The 
Treasury,  having  lost  most  of  its  gold  during  the  preceding 
three  years,  was  obliged  within  three  years  to  add  $262,000,000 
to  the  funded  debt,  receiving  in  cash  thereby  $293,000,000. 
During  the  six  years  1890  to  1896  the  country's  net  exports 
of  gold  amounted  to  $269,000,000,  and  the  total  exports  of  gold 
to  $497,000,000. 

247.  While  the  Treasury  was  going  through  this  exciting 
time  the  greenback  was  quite  generally  held  responsible  for 
all  the  mischief.  Greenbacks  were  the  agents  used  for  the 
withdrawal  of  gold  from  the  Treasury,  and  as  the  Secretary 
was  forced  to  pay  them  out  as  fast  as  they  were  redeemed, 
the  same  greenbacks  were  presented  over  and  over  again  for 
redemption.  What  was  called  an  "endless  chain^'  of  green- 
backs passed  into  and  out  of  the  Treasury,  carrying  gold  with 
it.  In  consequence  a  strong  sentiment  was  created  in  favor 
of  the  permanent  retirement  of  the  greenback,  and  an  agitation 
having  this  object  in  view  was  accordingly  begun. 

The  greenback,  however,  was  not  the  real  cause  of  the  Treas- 
ury's embarrassment  during  this  period.  The  force  which 
kept  this  endless  chain  in  motion  was  inflation,  (i)  from  the 
issue  of  Sherman  notes  and  (2)  from  the  Treasury  deficit.  The 
most  important  lesson  to  be  learned  from  the  events  of  this 
period  is  this:  that  an  artificial  increase  of  the  currency  of  a 
country,  from  whatever  source,  is  always  liable  to  cause  an 
exportation  of  gold.  Even  if  the  greenbacks  at  this  period  had 
not  been  in  existence,  or  if  they  had  not  been  redeemable  in 
gold  on  demand,  there  would  have  arisen  the  same  demand  for 
gold  for  export,  and  if  it  had  not  been  supplied  by  the  Treas- 
ury, it  would  have  been  bought  at  a  premium  in  open  market. 
In  other  words,  if  there  had  been  no  greenbacks,  and  if  the 


360  MONEY  AND   CURRENCY 

government  had  refused  to  give  gold   in  exchange  for  silver 
dollars,  depreciation  of  our  credit  money  would  have  resulted. 

248.  Another  lesson  taught  by  these  events  relates  to  the 
management  of  the  Treasury.    Its  operations  should  never  be 
permitted,  unless  for  good   reasons,   to   increase  or  diminish 
the  country's  supply  of  currency.    When  the  ordinary  receipts 
are  less  than  the  expenditures,  the  deficit  should  be  covered 
instantly  by  a  sale  of  bonds.    If  the  Treasury  at  such  a  time 
has  money  on  deposit  in  the  national  banks,  no  bond  sales  are 
necessary,  but  these  deposits  must  be  reduced  by  an  amount 
equal  to  the  deficit.     If  the   Secretary  of  the  Treasury  had 
sold  bonds    in  1894  whenever  the  rates  of  foreign  exchange 
approached  the  gold-export  point,  he  would  have  corrected  the 
redundancy  of  the  circulation  and  rendered  the  export  of  gold 
unnecessary.    It  would  not  have  been  necessary  that  the  bonds 
should  be  paid  for  in  gold.     The  gold  movement  was  the  result 
of  an  excess  of  currency;  a  permanent  reduction  of  any  part 
of  the  supply,  whether  gold,  silver,  or  greenbacks,  would  have 
checked  the  movement ;    but  a  temporary  reduction,  followed 
again  by  inflation,  could  do  no  good. 

Whenever  the  Treasury  receipts  exceed  the  expenditures,  so 
that  a  surplus  is  accumulating,  an  artificial  contraction  of  the 
country's  currency  results.  In  order  to  avoid  this  evil  the  Secre- 
tary of  the  Treasury  must  increase  the  deposits  of  public  moneys 
in  the  national  banks. 

LAW  OF  MARCH  14,  1900 

249.  The  presidential  campaign  of  1896,  although  it  resulted 
in  a  victory  for  the  friends  of  the  gold  standard,  disclosed  the 
startling  fact  that  nearly  one  half  of  the  people  of  the  United 
States  were  in  favor  of  the  free  and  unlimited  coinage  of  silver 
dollars.    The  friends  of  the  gold  standard,  therefore,  resolved 
not  to  rest  until  it  had  been  firmly  and  explicitly  established  in 
the  law.    In  1897  representative  bankers  and  business  men  held 
a  convention  in  Indianapolis  and  appointed  a  commission  to  con- 
sider plans  for  the  improvement  of  the  monetary  system.    A  bill 
prepared  by  this  commission  was  laid  before  Congress  in  1898. 


MONEY   IN   THE  UNITED   STATES  361 

It  provided  for  a  freer  issue  of  bank  notes,  for  the  gradual 
retirement  of  the  greenback  and  Sherman  notes,  and  for  the 
direct  redemption  of  silver  dollars  in  gold.  Congress  did  not 
pass  this  bill,  but  drafted  one  of  its  own,  which  became  a  law 
March  14,  1900. 

The  law  of  1873  made  25.8  grains  of  standard  gold  the  legal 
monetary  unit  of  the  United  States,  and  the  Resumption  Act 
of  1875  provided  for  the  practical  adoption  of  this  unit  in 
1879.  We  have  seen,  however,  that  the  full  realization  of  the 
gold  standard  in  1879  was  prevented  by  the  coinage  of  fiat 
silver  dollars  under  the  Bland- Allison  Act  of  1878.  For  twelve 
years  the  country  was  upon  a  "limping  standard,"  —a  joint 
standard  of  gold  and  fiat  money;  yet  the  price  level  was  deter- 
mined by  the  value  of  the  gold  dollar,  for  depreciation  of  the 
fiat  silver  dollars  was  prevented  by  limitation  of  their  supply 
and  by  the  increasing  demand  for  currency. 

The  Sherman  Act  of  1890  both  strengthened  and  weakened 
the  gold  standard  ;  it  made  the  silver  dollar  credit  money  to  be 
maintained  at  par  with  gold,  but  at  the  same  time  it  ordered 
larger  purchases  of  silver  and  further  inflation.  During  the 
next  six  years  the  gold  standard  was  several  times  near  dissolu- 
tion, but  the  presidential  campaign  of  1896  ended  in  a  triumph 
for  its  friends,  and  immediately  a  thorough  discussion  of  plans 
for  its  safeguarding  began. 

The  outcome  of  this  discussion  was  the  so-called  Gold  Stand- 
ard Act  of  March  14, 1900.  The  full  text  of  this  law  is  printed  in 
the  Appendix.  Its  most  important  provisions  are  the  following. 

1.  The  gold  dollar  shall  be  the  "  standard  unit  of  value,"  and 
it  shall  be  the  duty  of  the  Secretary  of  the  Treasury  to  main- 
tain "  all  forms  of  money  coined  or  issued  by  the  United  States  " 
at  a  parity  of  value  with  this  standard. 

2.  United  States  notes  and  Treasury  notes  of  1890  shall  be 
redeemed  in  gold  coin,  and  such  notes  when  redeemed  shall 
not  be  reissued  except  in  exchange  for  gold. 

3.  The  Secretary  of  the  Treasury  shall  maintain  a  reserve 
fund  of  $150,000,000,  and  whenever  the  gold  in  this  fund  falls 
under  $100,000,000  he  shall  "  restore  the  same  to  the  maximum 


362  MONEY  AND   CURRENCY 

sum  of  $150,000,000"  by  the  sale  of  bonds.  When  notes  are 
taken  from  the  reserve  fund  in  exchange  for  gold  thus  obtained, 
the  Secretary  may  use  them  for  any  lawful  purpose,  "  except 
that  they  shall  not  be  used  to  meet  deficiencies  in  the  cur- 
rent revenues." 

4.  There  shall  be  established  in  the  Treasury  Department  a 
division  of  issue  and  a  division  of  redemption,  in  which  shall 
be  kept  the  accounts  relating  to  the  issue  and  redemption  of 
United  States  notes,  Treasury  notes,  gold  certificates,  silver 
certificates,  and  currency  certificates;  the  funds  representing 
these  accounts  to  be  held  as  trust  funds. 

5.  The  Treasury  notes  of  1890  shall  be  retired  and  canceled 
by  the  substitution  therefor  of  silver  certificates  as  fast  as  the 
silver  bullion  bought  under  the  act  of  1890  is  coined. 

6.  Silver  certificates  shall,  for  the  most  part,  be  in  small 
denominations  ($10  and  less),  and  greenbacks  in  large  denomi- 
nations ($10  and  upward). 

7.  The  following  United  States  bonds,  the  5's  of  1904,  4's 
of   1907,  and  3*8  of  1908,  may  be  exchanged  for  new  2  per 
cent  bonds  payable  in  gold  after  thirty  years. 

8.  National  banks  may  issue  notes  equal  in  amount  to  the 
par  value  of  the  bonds  deposited  as  security,  and  the  tax  on 
the  notes  issued  against  the  deposit  of  2  per  cent  bonds  shall 
be  only  ^  of  I  per  cent  per  annum. 

The  act  expressly  declares  that  greenbacks  and  Treasury  notes 
shall  be  redeemed  in  gold  coin.  Until  1890  the  greenback  had 
been  a  coin  obligation  and  was  legally  redeemable  in  either  silver 
or  gold.  The  law  of  1890,  while  leaving  it  still  a  coin  obliga- 
tion, had  made  its  redemption  in  gold  compulsory  whenever 
such  redemption  was  necessary  to  maintain  its  parity  with  gold. 

Elaborate  provision  is  made  to  enable  the  Secretary  to  main- 
tain the  gold  redemption  of  the  greenback.  The  gold  reserve 
is  raised  from  $100,000,000  to  $150,000,000,  but  one  third  of 
this  fund  may  consist  of  greenbacks  which  have  been  redeemed. 
Whenever  the  gold  in  the  fund  falls  below  $100,000,000,  and 
cannot  be  increased  by  exchanges  of  greenbacks  for  gold  in  the 
general  fund  of  the  Treasury,  the  Secretary  must  obtain  gold  by 


MONEY   IN   THE  UNITED    STATES 


363 


the  sale  of  bonds.  He  is  left  without  discretion  in  the  matter. 
When  the  gold  fund  is  depleted  bonds  must  be  sold. 

The  establishment  of  the  division  of  issue  and  redemption 
was  important  only  from  the  bookkeeper's  point  of  view,  and  is 
an  imitation  of  the  organization  of  the  Bank  of  England. 

The  restriction  of  the  issue  of  silver  certificates  to  small 
denominations  was  intended  to  make  these  the  pocket  money 
of  the  people,  and  such  has  been  the  result.  Since  the  law  was 
passed  almost  all  the  Treasury  notes  of  1 890  have  been  retired, 
silver  certificates  having  taken  their  place.  The  Revenue  Act 
of  1898,  passed  when  this  country  was  at  war  with  Spain, 
authorized  the  coinage  of  the  silver  bullion  bought  under  the 
act  of  1890.  The  silver  certificates  that  have  supplanted  the 
Treasury  notes  of  1890  represent  the  dollars  which  have  been 
coined  from  this  bullion. 

250.  The  following  table  shows  the  different  kinds  of  cur- 
rency in  the  United  States. 

CURRENCY  SUPPLY  OF  THE  UNITED  STATES, 

FEBRUARY  i,  1905 

(Six  ciphers  omitted) 


In  Circula- 

In Treasury 

In  Treasury 

tion 

(belonging  to  it) 

(in  trust) 

Gold  coin  and  bullion     .     .     . 

650 

r66 

525 

1341 

Gold  certificates     

490 

35 



525 

Silver  dollars      

76 

8 

474 

558 

Silver  certificates   

460 

M 



474 

Subsidiary  silver    

IOI 

ii 



112 

U.  S.  notes  (greenbacks)      .     . 

334 

12 



346 

Treasury  notes  of  1890   .     .     . 

ii 





II 

National  bank  notes  .... 

445 

21 



466 

Totals 

2  1;6? 

26? 

QQQ 

->g->T 

yyy 

J°JJ 

Total  money   (gold) $1,341,000,000 

Total  credit  money 1,493,000,000 

Total  currency $2,834,000,000 

Total  lawful  money  in  circulation $2,070,000,000 

Total  legal  tender  in  circulation 1,050,000,000 


364  MONEY  AND   CURRENCY 

The  bullion  included  under  "  gold  coin  and  bullion"  consisted 
chiefly  of  bars  of  varying  degrees  of  fineness,  which  are  made 
by  the  mint  for  the  convenience  of  jewelers  and  gold  exporters. 
Of  the  $166,000,000  in  gold  belonging  to  the  Treasury,  $150,- 
000,000  was  held  in  the  reserve  fund  for  the  redemption  of 
greenbacks  and  maintenance  of  the  gold  standard  ;  the  remain- 
der was  part  of  the  Treasury's  general  cash  balance. 

The  gold  certificates  ($490,000,000)  are  paper  representatives 
of  the  gold  which  the  Treasury  holds  in  trust.  That  gold 
belongs  to  the  holders  of  these  certificates  and  can  be  claimed 
by  them  at  any  time.  The  certificates  are  not  legal  tender, 
but  are  receivable  by  the  government  in  payment  of  any  dues, 
and  are  "lawful  money"  in  banking  reserves.  Their  smallest 
denomination  is  $20. 

The  $474,000,000  in  silver  held  by  the  Treasury  in  trust 
belonged  to  the  holders  of  the  outstanding  certificates,  of  which 
the  Treasury  itself  held  $14,000,000.  Silver  dollars  are  legal 
tender  for  all  payments,  public  and  private,  the  principal  and 
interest  of  government  bonds  excepted.  They  are  credit  money, 
but  not  redeemable  in  gold  on  demand.  However,  in  ordinary 
times  the  holder  has  no  difficulty  in  exchanging  them  for  gold ; 
and  in  extraordinary  times,  if  nonredemption  should  threaten 
depreciation,  the  Secretary  of  the  Treasury  would  be  obliged 
to  redeem  them.  The  silver  certificates  are  not  legal  tender, 
but  are  receivable  by  the  government  in  payment  of  all  dues. 
They  are  "  lawful  money." 

The  $11,000,000  in  Treasury  notes  was  all  that  remained 
uncanceled  of  the  $156,000,000  issued  under  the  act  of  1890. 
The  silver  bullion  bought  under  that  act  has  been  coined  into 
dollars,  and  the  Treasury  will  henceforth  substitute  silver  cer- 
tificates for  Treasury  notes  as  fast  as  the  latter  can  be  obtained 
from  the  public.  The  Treasury  notes  have  all  the  legal-tender 
qualities  of  gold,  except  in  payment  of  principal  and  interest 
of  government  bonds.  They  are  redeemable  in  gold. 

The  United  States  notes,  or  greenbacks,  are  full  legal  tender 
except  for  the  payment  of  principal  and  interest  of  the  public 
debt.  The  $334,000,000  represented  as  in  circulation  is  an 


MONEY  IN  THE  UNITED   STATES  365 

estimate  and  is  undoubtedly  excessive,  for  no  allowance  is  made 
for  the  greenbacks  that  must  have  been  lost  by  fire  and  other- 
wise. Greenbacks  are  redeemable  in  gold  on  demand. 

The  subsidiary  silver  coins  (half  dollars,  quarter  dollars,  and 
dimes)  are  legal  tender  for  payments  not  exceeding  $10.  They 
are  coined  on  government  account  as  needed.  Until  1903  the 
law  fixed  the  maximum  limit  at  $100,000,000,  but  this  limit  has 
since  been  raised. 

The  bank  notes  are  not  legal  tender,  but  must  be  accepted 
by  all  national  banks  and  by  the  government  for  all  public  dues 
except  duties  on  imports,  and  may  be  paid  out  by  the  govern- 
ment for  all  dues  to  individuals  except  interest  and  principal  of 
the  public  debt.  Bank  notes  are  not  "lawful  money." 

About  50  per  cent  of  the  country's  currency  is  credit  money, 
and  much  of  this  is  both  lawful  money  in  banks  and  full  legal 
tender  in  payment  of  debts.  The  legal-tender  constituents  of 
the  currency  are  gold  coin,  silver  dollars,  United  States  notes, 
and  Treasury  notes  of  1 890.  Lawful  money  includes  the  fore- 
going and  gold  and  silver  certificates. 

LITERATURE 

WHITE,  Money  and  Banking,  passim;  J.  L.  LAUGHLIN,  History  of 
Bimetallism  in  the  United  States;  F.  W.  TAUSSIG,  The  Silver  Situation 
in  the  United  States  (New  York,  1896);  W.  G.  SUMNER,  A  History  of 
American  Currency;  G.  M.  COFFIN,  Silver  from  1849  to  1892;  A.  B. 
HEPBURN,  History  of  Coinage  and  Currency  in  the  United  States ;  W.  M. 
GOUGE,  A  Short  History  of  Paper  Money  and  Banking  in  the  United 
States  (Philadelphia,  1833)  i  C.  RAGUET,  A  Treatise  on  Currency  and 
Banking  (Philadelphia,  1839);  M.  L.  MUHLEMAN,  Monetary  Systems  of 
the  World;  Report  of  the  Indianapolis  Monetary  Commission;  C.  F. 
DUNBAR,  Laws  of  the  United  States  relating  to  Currency,  Finance,  and 
Banking  from  ij8g  to  i8gi ;  C.  J.  BULLOCK,  Essays  on  the  Monetary 
History  of  the  United  States ;  A.  D.  No  YES,  Thirty  Years  of  American 
Finance. ;  D.  K.  WATSON,  History  of  American  Coinage ;  J.  K.  UPTON, 
Money  in  Politics ;  F.  A.  WALKER,  Money ;  W.  A.  SCOTT,  Money  and 
Banking;  DAVID  KINLEY,  Money ;  annual  reports  of  Director  of  the  Mint, 
and  of  Comptroller  of  the  Currency. 


CHAPTER  XVII 
IS  THE  GOLD   STANDARD   SECURE? 

251.  Is  the  gold  standard  securely  established?  252.  Three  conditions  that 
may  lead  to  withdrawal  of  gold  from  the  Treasury:  (i)  a  deficit  in  national 
revenues;  (2)  business  depression;  (3)  bank-note  inflation.  253.  A  critical 
examination  of  the  defects  of  the  monetary  system  of  the  United  States  :  (i)  the 
position  of  the  national  Treasury  as  ultimate  redemption  agency;  (2)  the 
inelasticity  of  the  currency ;  (3)  the  excessive  quantity  of  government  credit 
money;  (4)  the  idle  hoard  of  silver  dollars  in  Washington.  The  first  two  defects 
are  fundamental  and  serious.  254.  The  supply  of  credit  money  exceeds  the 
amount  needed  as  hand-to-hand  currency.  255.  The  silver  bullion  in  the  Treasury 
is  not  the  source  of  the  value  of  the  silver  certificate.  256.  Two  considerations 
to  be  borne  in  mind  by  reformers:  (i)  the  situation  is  steadily  improving; 
(2)  the  addition  of  an  elastic  element  would  strengthen  the  position  of  the 
Treasury.  257.  It  would  be  inexpedient  to  permit  5000  small  banks  to  issue  notes 
freely  against  their  assets.  258.  The  establishment  of  a  semipublic  bank  with 
branches  would  be  the  simplest  solution  of  our  monetary  difficulties.  259.  Or  the 
privilege  of  issue  should  be  limited  to  banks  of  large  capital,  as  in  Canada. 
260.  The  suggestion  of  a  taxed  emergency  circulation  by  national  banks.  261.  A 
proposal  giving  the  Secretary  of  the  Treasury  a  power  over  the  money  market 
similar  to  that  exercised  by  the  Bank  of  England. 

251.  Is  the  gold  standard  securely  established?  Is  it  likely 
that  the  national  Treasury  will  ever  be  so  pressed  for  gold  that 
the  public  confidence  will  be  disturbed?  These  are  practical 
questions  which  cannot  be  answered  without  an  understand- 
ing of  the  forces  that  cause  men  to  present  greenbacks  to  the 
Treasury  for  redemption.  Under  normal  conditions  gold  is 
demanded  from  the  Treasury  only  when  the  foreign  exchange 
situation  compels  an  exportation  of  gold  ;  then  either  green- 
backs or  gold  certificates  are  likely  to  be  presented  for  redemp- 
tion. The  presentation  of  gold  certificates  can  occasion  no 
embarrassment  to  the  Treasury,  for  it  holds  in  a  special  fund 
a  supply  of  gold  coin  equal  in  amount  to  the  face  value  of  all 
the  certificates  outstanding.  But  the  redemption  of  greenbacks 
is  a  direct  drain  upon  the  Treasury's  stock  of  so-called  "  free 

366 


IS  THE  GOLD  STANDARD   SECURE?  367 

gold,"  and  may  cut  into  the  reserve  fund  of  $150,000,000.  Let 
us  consider  what  circumstances  are  likely  to  lead  to  an  exporta- 
tion of  gold,  and  hence  to  a  reduction  of  the  Treasury's  supply. 

In  the  first  place  we  must  note  a  gold  movement  that  is 
entirely  normal  and  always  to  be  expected.  The  United  States 
is  a  large  producer  of  gold ;  in  1904  its  mines  yielded  gold 
having  a  coinage  value  of  about  $80,000,000.  The  annual  in- 
crement to  the  existing  stock  may  often  prove  a  larger  amount 
than  is  needed  in  the  United  States,  in  which  case  the  surplus 
will  always  be  exported.  The  outflow  of  that  surplus  will 
be  brought  about  in  a  natural  way,  namely,  by  a  shifting  of 
the  balance  of  indebtedness  between  the  United  States  and 
foreign  countries,  prices  in  the  United  States  being  for  a  time 
relatively  high  and  the  rate  of  discount  relatively  low.  The 
exportation  of  gold  under  these  circumstances  is  never  likely 
to  produce  any  ill  effect,  for  the  gold  goes  out  before  it  has 
become  a  real  part  of  the  country's  money  supply.  It  is  either 
taken  from  the  vaults  of  banks  or  withdrawn  from  the  Treasury 
in  exchange  for  gold  certificates.  The  outflow  will  not  lessen 
the  amount  of  gold  in  actual  use  in  the  country  as  money;  it 
will  simply  prevent  that  amount  from  increasing. 

252.  Three  conditions,  however,  may  arise  that  may  lead  to 
a  gold  movement  which  will  seem  abnormal  and  undesirable, 
for  a  positive  reduction  of  the  country's  monetary  stock  of  gold 
would  result.  These  conditions  are  :  (i)  a  deficit  in  national 
revenues  ;  (2)  business  depression ;  (3)  bank-note  inflation. 

DEFICIENCY  IN  THE  REVENUES 

The  Treasury  Department  of  the  United  States  occupies  a 
unique  position  among  national  treasuries.  It  is  the  only  one 
in  the  world  which  hoards  in  its  vaults  large  sums  of  money 
or  currency.  The  treasury  departments  of  most  other  nations 
deposit  all  their  receipts  in  banks,  and  hence  are  never  liable 
by  their  operations  either  to  inflate  or  to  contract  the  supply 
of  currency  available  for  use  among  the  people.  But  the  United 
States  Treasury  collects  all  its  revenues  in  cash  and  always 


368  MONEY  AND  CURRENCY 

carries  a  large  amount  in  its  own  vaults.  Under  the  law  it  is 
permitted  to  deposit  only  a  part  of  its  receipts  —  those  from 
the  internal  revenues  —  in  the  national  banks.  Furthermore 
the  Secretary  of  the  Treasury  has  no  control  over  either  receipts 
or  expenditures.  The  expenditures  are  prescribed  by  Congress 
and  the  receipts  depend  upon  the  operation  of  laws  enacted  by 
that  body.  Sometimes  it  happens  that  receipts  are  less  than 
expenditures,  and  an  artificial  inflation  of  the  country's  supply 
of  currency  is  the  result.  An  inflation  of  the  currency  result- 
ing from  a  revenue  deficit  has  the  same  effect  upon  prices  and 
the  rate  of  interest  as  an  issue  of  new  paper  money.  It  gives 
an  artificial  stimulus  to  imports  of  merchandise  and  securities 
and  leads  to  an  outward  flow  of  gold.  Under  such  conditions 
the  gold  exported  will  usually  be  withdrawn  from  the  Treasury 
by  the  exchange  either  of  greenbacks  or  gold  certificates.  At 
a  time  when  the  banks  have  a  large  supply  of  gold  certificates 
on  hand,  if  perfect  confidence  prevails  in  the  business  out- 
look and  in  the  government's  purpose  and  power  to  increase 
the  receipts  from  taxation,  an  export  movement  of  gold  as  a 
result  of  a  revenue  deficit  is  not  likely  to  do  any  mischief,  for 
much  of  the  gold  will  be  obtained  from  the  Treasury  by  the 
exchange  of  gold  certificates.  But  if  the  situation  excites  any 
alarm  in  the  business  community,  greenbacks  will  be  presented 
for  redemption  and  then  the  Treasury's  gold  reserve  will  be  in 
danger. 

The  Secretary  of  the  Treasury  is  not  entirely  helpless  in  the 
face  of  a  revenue  deficit.  If  he  has  funds  at  his  disposal  in  the 
national  banks,  he  is  able  to  prevent  currency  inflation  simply 
by  the  reduction  of  these  deposits,  thus  keeping,  the  cash  bal- 
ance in  the  Treasury  unimpaired.  This  method  of  financing  a 
deficit  is  available,  of  course,  only  so  long  as  the  Treasury  has 
funds  in  the  banks  ;  when  these  are  exhausted,  if  the  revenue 
deficit  continues,  an  outflow  of  cash  from  the  Treasury  must 
begin,  reducing  its  cash  balance,  inflating  the  circulation,  and 
expelling  gold.  If  the  resultant  demand  for  gold  reduces  the 
reserve  fund  to  less  than  $100,000,000,  the  Secretary  must  then, 
by  the  sale  of  bonds,  bring  the  amount  of  gold  in  the  fund  up 


IS  THE  GOLD   STANDARD   SECURE?  369 

to  $150,000,000.  Bond  sales,  by  reducing  the  amount  of  money 
in  circulation,  would  tend  to  lower  foreign  exchange  rates,  check 
the  exportation  of  gold,  and  so  stop  the  drain  upon  the  Treasury. 
It  is  in  this  connection  that  the  necessity  for  a  liberal  inter- 
pretation of  the  clause  referring  to  "  deficiencies  in  the  current 
revenues "  becomes  apparent.  This  clause  provides  that  the 
greenbacks  taken  from  the  reserve  fund  shall  not  be  used  to 
meet  a  revenue  deficit,  and  hence  that  they  shall  not  be  paid 
out  so  long  as  such  a  deficit  exists.  The  framers  of  the  law 
doubtless  aimed  especially  at  the  locking  up  of  redeemed  green- 
backs in  the  Treasury,  in  order  that  the  same  bills  might  not  be 
used  again  and  again,  as  happened  in  1895,  in  the  withdrawal 
of  gold.  As  pointed  out,  however,  the  operation  of  the  law  will 
have  another  good  effect,  for  it  will  prevent  further  inflation 
of  the  currency,  and  so  tend  to  check  the  exportation  of  gold, 
thus  bringing  relief  to  the  Treasury.  But  this  good  result,  if 
the  law  is  strictly  interpreted,  cannot  be  brought  about  until 
after  the  Treasury  has  already  lost  considerable  gold.  Since  the 
law  makes  it  the  duty  of  the  Secretary  of  the  Treasury  to  main- 
tain all  " forms  of  money"  at  a  parity  with  the  gold  dollar,  it 
would  be  well  if  he  had  the  power  to  sell  bonds  the  moment 
that  a  deficiency  of  revenues  began  to  lessen  the  Treasury's 
cash  balance,  for  then  he  would  be  able  at  the  outset  to  correct 
the  situation  and  avoid  currency  inflation,  with  its  resultant 
demand 'for  gold  and  possible  impairment  of  public  confidence. 
Since  the  law  does  not  clearly  give  the  Secretary  the  power  to 
take  this  precautionary  step  when  danger  is  in  sight,  it  should 
be  amended. 

HARD  TIMES  AND  GOLD  EXPORTS 

The  second  cause  of  gold  exports,  business  depression,  is 
something  to  which  the  country  is  always  exposed.  In  the 
business  world  periods  of  great  activity  are  uniformly  followed 
by  periods  of  depression.  During  the  dull  periods  the  demand 
for  money,  both  as  a  medium  of  exchange  and  as  a  basis  for 
credit,  suffers  great  contraction.  Illustrations  of  such  a  shrink- 
age in  the  need  for  currency  were  furnished  in  the  years 


370  MONEY  AND   CURRENCY 

following  the  panics  of  1873,  1884,  and  1893.  In  1873  the 
country  was  upon  the  greenback  basis,  and  hence  contraction 
of  the  money  demand  had  no  effect  upon  the  exportation  of 
gold.  For  seven  years  prior  to  1884  the  imports  of  gold  into 
this  country  had  exceeded  the  exports,  but  the  net  exports  in 
1884,  1885,  and  1886  amounted  to  over  $22,000,000.  The  panic 
of  1893  was  followed  by  heavy  exports  of  gold  during  the  next 
three  years. 

At  the  present  time  a  contraction  of  the  need  for  money, 
rendering  the  currency  redundant  and  so  causing  an  exporta- 
tion of  gold,  is  not  liable  to  arouse  such  alarm  as  prevailed  in 
1894  and  1895,  for  the  country  now  has  such  an  abundant 
stock  of  gold  that  an  export  demand  for  it  leads  to  the  redemp- 
tion of  gold  certificates  rather  than  of  greenbacks.  Yet  even 
now,  if  confidence  were  disturbed,  gold  certificates  might  be 
hoarded  and  greenbacks  presented  for  redemption  instead.  It 
should  be  noted  that  in  dull  times  confidence  is  most  easily 
disturbed,  and,  furthermore,  that  in  such  times  the  receipts  of 
the  Treasury  are  most  likely  to  fall  below  expenditures,  so 
that  two  forces  are  liable  to  combine  during  such  a  period  to 
bring  about  an  outward  movement  of  gold.  Under  such  circum- 
stances, if  anything  happens  to  make  bankers  reluctant  to  part 
with  their  gold  certificates,  the  Treasury  is  likely  to  be  called 
upon  to  redeem  greenbacks,  and  to  use  for  that  purpose  the 
gold  in  the  reserve  fund. 

DANGER  FROM  BANK-NOTE  INFLATION 

An  inflation  of  the  currency  by  an  issue  of  bank  notes  is 
always  possible,  as  was  pointed  out  in  Chapter  XV,  for  the  issues 
are  never  put  forth  in  response  to  a  monetary  demand.  That 
the  national  bank  note  may  prove  an  element  of  danger  was 
illustrated  in  the  "  endless  chain"  period  of  1894-1895.  In  those 
years,  although  the  currency  inflation  occasioned  by  the  defi- 
ciency of  revenues  nearly  exhausted  the  Treasury's  gold  reserve, 
the  national  banks,  nevertheless,  steadily  increased  their  cir- 
culation, government  bonds  having  been  cheapened  by  the  new 


IS  THE  GOLD   STANDARD   SECURE?  371 

issues  put  forth  in  the  purchase  of  gold.  In  January,  1894,  the 
circulation  of  the  banks  stood  at  $193,000,000;  by  October, 
1896,  it  had  increased  to  $222,000,000.  Again,  in  1903-1904 
the  banks  increased  their  circulation  at  a  time  when  the  coun- 
try's need  for  cash  was  manifestly  on  the  decline  as  a  result 
of  the  financial  and  industrial  reaction  which  began  in  the  sum- 
mer of  1903.  During  the  fiscal  year  ending  June  30,  1904,  the 
volume  of  bank  notes  in  circulation  increased  $44,000,000. 

As  the  country's  need  for  currency  was  not  increasing  during 
this  period,  it  is  not  surprising  that  over  $60,000,000  in  gold  was 
exported  during  the  spring  of  1904.  These  exports,  however, 
gave  the  Treasury  no  trouble,  for  the  gold  was  obtained  by  the 
exchange  of  gold  certificates.  Yet  if  similar  conditions  were  to 
continue,  confidence  might  be  disturbed,  gold  be  hoarded,  and 
the  Secretary  of  the  Treasury  again  be  forced  to  sell  bonds. 

In  ordinary  times  no  one  of  these  gold-expelling  forces  is  to 
be  feared;  but  at  a  critical  time  when  business  is  prostrate  and 
politicians  are  seeking  for  monetary  legislation  disapproved  by 
business  interests,  these  three  forces,  working  together,  might 
easily  arouse  popular  distrust  and  lead  timid  people  to  redeem 
greenbacks  in  amounts  that  would  be  embarrassing.  That  the 
Secretary  of  the  Treasury,  even  under  such  circumstances, 
would  be  able  by  the  prompt  sale  of  bonds  to  meet  all  demands 
and  maintain  the  integrity  of  the  gold  standard,  there  is  no 
reason  to  doubt ;  yet  it  is  a  pity  that  the  standard  is  liable 
even  to  assault.  This  liability  must  be  considered  a  defect  of 
our  system  to  be  remedied  by  further  legislation. 

With  the  lapse  of  time  the  monetary  situation  in  the  United 
States,  if  no  further  legislative  mistakes  are  made,  is  pretty  cer- 
tain to  improve,  for  the  proportion  of  gold  in  the  monetary 
stock  seems  destined  to  increase.  According  to  official  esti- 
mates the  stock  of  gold  increased  from  $600,000,000  in  1894  to 
$1,200,000,000  in  1904,  a  gain  of  100  per  cent.  In  1894  only 
about  $60,000,000  in  gold  certificates  was  in  circulation ;  in 
1905,  over  $500,000,000.  As  the  supply  of  certificates  increases, 
the  forces  that  cause  an  exportation  of  gold  are  less  and  less 
liable  to  start  a  "  run  "  upon  the  Treasury's  gold  reserve. 


372  MONEY  AND   CURRENCY 

DEFECTS  OF  THE  SYSTEM 

253.  The  monetary  system  of  the  United  States,  although 
much  better  than  it  was  in  1890,  is  still  far  from  being  ideal. 
Before  considering  proposals  for  its  reform  it  is  well  to  have  a 
clear  idea  of  its  defects.  These  may  be  summed  up  as  follows  : 

1.  The  position  of  the   national   Treasury  as   the  ultimate 
redemption  agency. 

2.  The  inelasticity  of  the  currency. 

3.  The  excessive  quantity  of  government  credit  money. 

4.  The  idle  and  useless  hoard  of  silver  dollars  in  Washington. 
The  first  two  defects  mentioned  are  fundamental  and  serious. 

The  harm  they  may  work  has  already  been  illustrated,  so  that 
here  little  more  is  necessary  than  recapitulation.  The  United 
States  Treasury,  as  has  been  shown,  is  isolated  from  the  money 
market ;  it  cannot  lend,  and  it  can  borrow  only  by  the  sale  of 
bonds ;  its  receipts  and  expenditures  are  arbitrarily  determined 
by  acts  of  Congress,  so  that  its  operations  are  always  liable 
either  to  inflate  or  to  contract  the  amount  of  currency  in  circu- 
lation. When  its  receipts  are  excessive  it  may  prevent  strin- 
gency by  deposit  of  the  surplus  in  national  banks ;  when  its 
expenditures  are  excessive  it  can  prevent  inflation  only  by  the 
sale  of  bonds.  It  is  not  a  dealer  in  credit,  and  it  has  no  natural 
relations  with  the  credit  or  so-called  money  market.  Yet  upon 
this  institution  now  rests  the  whole  duty  of  maintaining  the 
gold  standard ;  its  manager  must  redeem  government  notes  on 
demand,  and  must  keep  $600,000,000  of  silver  currency  at  par 
with  the  gold  dollar. 

The  maintenance  of  a  monetary  standard  is  a  banking  and 
not  a  government  function.  Banks  are  dealers  in  credit,  in 
contracts  to  deliver  money.  The  strict  enforcement  of  these 
contracts,  which  is  a  proper  governmental  duty,  would  suffice 
to  prevent  depreciation.  In  the  United  States,  however,  banks 
are  not  compelled  to  redeem  their  obligations  in  money,  but 
are  permitted  to  redeem  them  in  various  forms  of  credit  for  the 
redemption  of  which  the  national  Treasury  is  alone  responsible. 
Hence  the  banks  feel  no  responsibility  for  the  maintenance  of 


IS   THE  GOLD   STANDARD   SECURE? 


373 


the  gold  standard,  and  no  bank  is  under  any  inducement,  natu- 
ral or  artificial,  to  assist  the  Treasury  in  its  difficult  task.  Banks 
are  the  institutions  from  which  gold  should  be  obtained  for 
exportation,  for  banks,  by  raising  the  rate  of  discount  or  by 
contracting  their  credits,  are  able  to  check  gold  exports  when- 
ever they  wish  to  guard  their  reserves  against  depletion.  In 
the  United  States  banks  do  not  do  this  work  simply  because 
the  government  undertakes  to  do  it  for  them. 

The  advantages  of  an  elastic  element  in  the  currency  have 
already  been  briefly  discussed.  A  bank-note  system  which  pro- 
vides "  hand-to-hand  money  "  in  the  amounts  needed,  expanding 
automatically  in  busy  seasons  and  contracting  in  dull,  prevents 
unnecessary  fluctuations  in  the  rate  of  interest  and  in  the  level 
of  prices,  and  saves  business  interests  from  much  annoyance 
and  loss.  In  the  United  States,  on  account  of  the  restrictions 
placed  upon  the  issue  of  bank  notes,  an  increasing  need  for 
money  is  satisfied  not  by  an  expansion  in  the  volume  of  bank 
notes  but  by  the  withdrawal  of  lawful  money  from  banking 
reserves  ;  as  a  result,  the  rate  of  discount  rises,  borrowers  of  all 
classes  are  pinched,  mercantile  and  manufacturing  enterprises 
surfer,  the  prices  of  commodities  and  securities  sag,  and  finally 
gold  is  imported.  On  the  other  hand,  when  the  need  for  money 
decreases,  bank  notes  are  not  retired,  the  channels  of  circula- 
tion overflow,  banking  reserves  are  swollen,  and  gold  is  exported. 
Thus  the  inelasticity  of  the  currency  in  the  United  States  works 
harm  in  two  ways  :  it  places  an  unnecessary  handicap  upon 
industry,  and  it  compels  an  inflow  and  an  outflow  of  gold  which 
might  be  avoided. 

EXCESSIVE  SUPPLY  OF  CREDIT  MONEY 

254.  In  the  chapter  on  Credit  Money  it  was  shown  that  the 
outstanding  circulation  of  government  credit  money  could  not 
safely  exceed  the  needs  of  the  country  for  currency  of  small 
denominations,  that  is,  $10  and  under.  In  the  United  States 
on  February  i,  1905,  the  total  amount  of  government  credit 
money,  including  subsidiary  silver  coins,  was  in  round  numbers 


374  MONEY  AND   CURRENCY 

$1,000,000,000,  or  fully  twice  the  amount  in  use  as  pocket  and 
till  money.  The  average  demand  for  currency  of  small  denomi- 
nations seems  to  be  about  $7  per  capita,  whereas  the  existing 
supply  of  credit  money  on  February  I,  1905,  amounted  to  $14 
per  capita.  These  figures  do  not  show  the  situation  at  its  worst, 
for  we  have  not  included  bank  notes  in  our  calculations.  Since 
these  are  redeemable  in  gold,  greenbacks,  or  silver  dollars,  it  is 
evident  that  their  presence  in  the  circulation  puts  into  the  hands 
of  their  holders  the  power  to  demand  gold  from  the  Treasury. 
A  national  bank  note  is  redeemable  at  the  counter  of  the  issuing 
bank,  and  at  the  national  Treasury,  which  holds  a  redemption 
fund  equal  to  5  per  cent  of  the  notes  in  circulation,  contributed 
pro  rata  by  the  issuing  banks.  Since  a  person  holding  bank 
notes  can  exchange  them  at  the  Treasury  for  greenbacks  or 
silver  dollars,  and  since  the  Treasury  is  responsible  for  the 
parity  of  these  with  gold,  it  is  evident  that  the  national  bank 
note,  as  a  source  of  peril  to  the  Treasury,  is  hardly  less  impor- 
tant than  the  greenback  and  the  silver  dollar. 

255.  The  fourth  unscientific  feature  of  the  monetary  system 
of  the  United  States  —  the  idle  hoard  of  silver  dollars  at  Wash- 
ington—  is  not  in  itself  a  source  of  peril.  It  is  objectionable 
merely  because  of  the  unnecessary  waste  of  capital  that  is 
involved.  The  silver  dollar  is  government  credit  of  general 
acceptability ;  it  is  credit  money  and  in  all  essential  respects  is 
like  the  greenback,  its  value  being  due  not  to  the  silver  it  con- 
tains but  to  the  government's  guaranty,  expressed  in  the  law 
of  March  14,  1900,  that  it  shall  always  be  worth  a  gold  dollar. 
Now  there  is  no  reason  why  the  United  States  should  write 
many  of  its  promissory  notes  on  a  material  so  expensive  as 
silver,  although  it  does  with  them  what  it  does  with  no  other 
kind  of  currency,  —  ships  them  to  any  part  of  the  country  with- 
out cost  to  the  consignee.  The  silver  certificate  is  popularly 
supposed  to  have  value  because  of  the  silver  dollar  held  in  trust 
in  Washington.  This  is  a  mistake.  The  silver  certificate  is 
worth  100  cents  on  the  dollar  because  people  have  faith  in  the 
purpose  and  ability  of  the  government  to  keep  it  at  par  with 
gold ;  and  its  purchasing  power  would  not  decline  even  though 


IS   THE  GOLD   STANDARD   SECURE?  375 

silver  became  as  cheap  as  tin.  It  is  a  mistake  to  regard  the  silver 
dollars  at  Washington  as  an  asset  strengthening  the  Treasury's 
position  as  redemption  agent ;  or  to  regard  them,  as  some  do, 
as  being  half  fiat  and  half  real  money,  because  at  the  market 
price  of  silver  the  bullion  in  a  silver  dollar  is  "  worth  "  50  cents. 
The  silver  dollar  and  the  certificate  are  both  indirectly  redeem- 
able in  gold,  not  in  silver  bullion ;  and  the  task  of  redemption, 
or  their  maintenance  at  par  with  gold,  would  be  no  more  difficult 
were  all  the  silver  dumped  in  mid-ocean.  As  an  asset  silver 
bullion  is  very  uncertain  in  value.  If  the  government  should 
decide  to  redeem  and  retire  its  silver  credit  money,  it  might 
obtain  some  gold  by  the  sale  of  silver  bullion,  but  the  sales, 
unless  continued  through  a  long  period,  would  be  made  upon 
a  rapidly  declining  market.  As  a  source  of  revenue  for  the 
redemption  of  silver  dollars,  the  sale  of  bullion  would  be  insig- 
nificant in  comparison  with  the  government's  taxing  and  borrow- 
ing powers. 

Two  CAUSES  OF  BETTERMENT 

256.  It  is  much  easier  to  point  out  the  defects  of  a  monetary 
system  than  to  suggest  wise  and  practicable  reforms.  The 
enthusiast  who  clamors  for  the  ideal  not  only  runs  up  against 
a  stone  wall  of  popular  prejudice,  but  also  in  his  haste  often 
seeks  to  drag  people  over  a  rough  road  where  bruises  would  be 
received  for  which  the  ideal  offers  no  compensating  balm.  The 
monetary  system  of  the  United  States  cannot  be  perfected  at 
a  single  session  of  Congress.  Many  years  of  debate,  experi- 
ment, education,  and  compromise  must  elapse  before  the  "money 
question  "  can  be  taken  out  of  politics  and  declared,  even  for  a 
generation,  settled. 

Before  considering  the  possibility  or  practicability  of  sug- 
gested improvements,  attention  should  be  drawn  to  two  im- 
portant considerations  :  (i)  in  the  natural  course  of  events, 
even  without  legislation,  the  situation  will  steadily  improve  ; 
(2)  the  addition  of  an  elastic  element  to  the  currency  would 
render  the  unscientific  features  of  the  monetary  system  com- 
paratively innocuous. 


376  MONEY  AND   CURRENCY 

In  support  of  the  first  point  little  need  be  said.  The  world's 
gold  mines  are  steadily  enlarging  the  base  of  the  system  and  so 
rendering  the  exportation  of  a  few  million  dollars'  worth  of  gold 
of  less  and  less  consequence.  As  the  gold  holdings  of  banks 
increase,  the  demands  of  gold  exporters  upon  the  Treasury's 
gold  reserve  will  surely  decrease.  And  as  the  population  grows, 
a  larger  and  larger  proportion  of  the  government's  credit  money 
will  be  absorbed  by  the  people,  and  a  smaller  proportion  lie 
in  banks  as  a  menace  to  the  gold  reserve.  Since  time  is  on 
the  side  of  improvement,  the  monetary  reformer  should  move 
with  caution,  for  no  legislation  at  all  is  better  than  unwise 
legislation. 

Concerning  the  second  point  —  the  remedial  potency  of  elas- 
ticity—  it  remains  only  to  correlate  the  conclusions  reached  in 
Section  253.  It  was  there  pointed  out  that  a  perfectly  elastic 
bank-note  currency  would  render  unnecessary  much  of  the 
international  traffic  in  gold  in  which  the  United  States  is  now 
forced  to  engage.  That  conclusion  being  granted,  it  follows 
that  if  this  country  had  a  banking  system  capable  of  supply- 
ing an  elastic  currency,  like  that  of  Canada  or  of  France,  the 
national  Treasury,  even  though  it  remained  the  final  redemption 
agency  of  greenbacks  and  silver  dollars,  would  be  seldom  called 
on  to  pay  out  gold.  If  the  currency  tended  toward  redundancy 
because  of  a  deficiency  of  revenues  or  because  of  reaction  and 
dullness  in  the  business  world,  there  would  be  no  occasion  for 
gold  export  and  no  withdrawal  of  gold  from  the  Treasury,  for 
the  automatic  contraction  of  bank-note  circulation  would  supply 
an  immediate  corrective.  This  is  a  most  important  point  in 
favor  of  the  reform  of  our  bank-note  system,  and  one  that  has 
not  been  sufficiently  emphasized.  In  this  particular  England 
and  the  United  States  are  both  suffering  alike  from  the  rigidity 
of  their  currency,  and  both  are  as  a  result  constantly  and  nerv- 
ously engaged  in  shipping  and  reshipping  the  same  bars  of  gold 
across  the  ocean.  When  one  considers  how  easily  bank  credit 
can  be  made  to  fill  a  currency  vacuum,  these  incessant  gold 
shipments  between  London  and  New  York,  and  the  anxious 
conjectures  they  occasion,  seem  almost  ludicrously  absurd. 


IS   THE  GOLD   STANDARD   SECURE? 


PLANS  TO  SECURE  ELASTICITY 


377 


257.  Let  us  consider  what  can  safely  be  done  to  make  the 
credit  currency  elastic.    In  the  last  ten  years  numerous  plans 
have  been  suggested,  but  most  of  them  have  been  faulty  in  that 
they  failed  to  provide  that  the  redemption  of  the  currency  shall 
be  as  easy  and  as  certain  as  its  issue.    In  September,  1905,  there 
were  5831  national  banks  in  the  United  States.    To  permit  all 
these  banks,  big  and  little,  to  issue  notes  freely  against  their 
general  assets,  without  deposit  of  special  security,  would  evidently 
be  unsafe,  for  all  could  not  maintain  the  expensive  but  neces- 
sary machinery  of  redemption  ;  and  unless  the  notes  were  easily 
redeemable  in  all  parts  of  the  country,  inflation  and  deprecia- 
tion would  be  inevitable.    It  has  been  suggested  that  the  gov- 
ernment  redeem   such   notes   at   its   subtreasuries,  the  banks 
maintaining  a  proper  redemption  fund  at  Washington.  This  plan 
is  open  to  several  objections,  besides  the  important  one  that  it 
would  increase  rather  than  lighten  the  burdens  of  the  Treasury. 
In  a  country  so  large  as  the.  United  States  it  is  doubtful  if  any 
scheme  can  be  devised  that  will  render  safe  and  expedient  an 
elastic  credit  currency  issued  by  several  thousand  small  banks. 

258.  The  establishment  of  one  large  bank,  possessing  exclu- 
sive privilege  of  note  issue  and  having  the  right  to  establish 
branches  in  all  parts  of  the  country,  would  probably  be  the 
simplest  and  most  scientific  solution  of  our  monetary  difficulties. 
Such  a  bank  should  be  subject  to  government  control  and  regu- 
lation, and  should  be  required  to  redeem  in  gold  not  only  its 
own  notes  but  also  all  forms  of  government  credit  money.    It 
would  act  as  fiscal  agent  for  the  government  and  as  the  depos- 
itory of  public  funds.    Such  a  bank,  with  its  branches  serving 
as  redemption  agencies,  would  provide  the  country  with  a  per- 
fectly safe  and  elastic   currency.    Space   cannot  be  taken  to 
describe  in  detail  the  functions  and  organization  of  such  a  bank. 
It  would  in  no  sense  be  an  experiment,  for  such  semipublic 
banks  are  now  in  operation  in  many  countries.    We  might  take 
as  a  model  the  Bank  of  France  or  the  Imperial  Bank  of  Ger- 
many, or  we  might  to  advantage  be  guided  again  by  Hamilton's 


378  MONEY  AND   CURRENCY 

famous  Report  on  a  National  Bank,  and  reestablish  a  Bank  of 
the  United  States.  However,  it  is  commonly  held  that  the 
creation  of  a  large  central  bank  in  this  country  is  now  out  of 
the  question.  Many  politicians  would  oppose  it  as  being  a  dan- 
gerous centralization  of  financial  power,  and  existing  banking 
interests  would  certainly  not  welcome  it  as  a  competitor  in 
the  loan  market. 

259.  If  it  is  granted  that  a  large  semipublic  bank  cannot  be 
created,  then  the  power  of  issuing  notes  might  be  restricted,  as 
in  Canada,  to  banks  of  very  large  capital.    Let  us  suppose  that 
any  bank  having  a  capital  of  $10,000,000  be  permitted  to  issue 
notes  up  to  the  amount  of  its  capital  stock  on  condition  that  it 
conform  to  the  following  requirements  :  first,  that  it  maintain 
redemption  agencies  in  twelve  different  cities  of  the  United 
States ;  second,  that  it  redeem  its  notes  in  gold  on  demand  at 
its  head  office  and  at  each  of  its  redemption  agencies;  third, 
that  it  be  bound  to  assist  the  government,  whenever  necessary, 
in  obtaining  gold  for  the   redemption   of  government   credit 
money.    Thus  might  be  organized  a  number  of  strong  banks 
enjoying  special  privileges,  and  obliged,  in  protection  of  their 
rights  and  their  gold  reserves,  to  work  with  the  government 
in  the  protection  of  the  gold  standard.    This  plan  involves  such 
radical  legislation  that  it  cannot  be  considered  practicable  at 
the  present  time. 

260.  Under  present   conditions  an   elastic   element  in  the 
currency  seems  attainable  only  by  some  slight  modification  of 
existing  law.    The  suggestion  has  several  times  been  made  that 
the  national  banks  be  permitted  in  times  of  emergency  to  issue 
a  taxed  circulation  not  based  on  government  bonds.    This  sug- 
gestion is  borrowed  from  Germany,  whose  Imperial  Bank  is 
permitted  to  issue  notes  above  a  certain  amount  only  on  pay- 
ment of  a  tax  of  5  per  cent  per  annum.    Such  issues  are  not 
made,  of  course,  unless  a  financial  stringency  raises  the  market 
rate  of  interest  above  5  per  cent ;  and  when  the  emergency  is 
over,  the  rate  of  interest  declining,  a  strong  motive  exists  for 
the  retirement  of  the  emergency  notes.    This  plan,  it  should  be 
noted,  provides  some  degree  of  elasticity,  but  at  the  expense  of 


IS   THE  GOLD   STANDARD   SECURE?  379 

the  business  community,  for  the  tax  really  comes  out  of  the 
public  and  not  out  of  the  bank.  As  a  step  in  the  right  direction 
much  can  be  said  in  favor  of  this  plan. 

261.  A  bill  that  was  before  Congress  in  1903,  known  as  the 
Aldrich  Bill,  contained  a  feature  that  is  worthy  of  consideration. 
It  proposed  that  national  banks  be  required  to  pay  2  per  cent 
interest  on  government  funds  deposited  with  them.  Such  a 
measure  might  serve  a  useful  purpose,  but  the  rate  of  interest 
should  not  be  fixed,  nor  should  the  banks,  as  now,  be  required 
to  deposit  government  bonds  as  security.  If  the  rate  of  inter- 
est were  variable  at  the  discretion  of  the  Secretary  of  the 
Treasury,  that  officer  would  be  able  to  exercise  at  times  a 
salutary  influence  upon  the  money  market.  When  a  redundancy 
of  the  currency  was  causing  an  undesirable  outflow  of  gold  and 
so  threatening  the  gold  reserve  of  the  Treasury,  the  Secretary 
could  bring  about  some  contraction  of  the  currency  and  of 
bank  credits  by  raising  the  rate  of  interest  exacted  from  deposi- 
tory banks,  and  thus  keep  the  rates  of  foreign  exchange  below 
the  gold-export  point.  On  the  other  hand,  in  times  of  strin- 
gency, the  Secretary  could  lend  assistance  at  a  rate  of  interest 
just  low  enough  to  make  the  public  deposits  attractive  to  the 
banks.  A  law  of  this  sort,  it  should  be  noted,  would  give  the 
national  Treasury  a  power  to  influence  the  money  market  simi- 
lar, though  less  in  degree,  to  that  now  possessed  by  the  Bank  of 
England.  That  institution  protects  its  gold  reserve  by  an  arti- 
ficial manipulation  of  the  rate  of  discount.  Since  the  Bank  of 
England  cannot  issue  notes  freely,  an  increasing  demand  for 
currency  always  tends  to  lessen  the  ratio  of  its  reserve  to 
its  liabilities.  Under  such  conditions  the  bank  raises  its  rate 
of  discount,  thereby  stiffening  the  open  market  rate  and  so 
attracting  gold  to  London.1  The  Treasury  of  the  United  States, 
as  a  result  of  the  measures  proposed  in  this  paragraph,  would 
be  far  from  having  the  powers  of  a  bank,  yet  to  some  extent  it 
would  be  able  to  influence  the  market  rate  of  interest  and  so 
be  better  equipped  than  now  to  protect  its  gold  reserve. 

1  Bagehot's  Lombard  Street  contains  an  interesting  analysis  of  the  Bank  of 
England's  relation  to  the  money  market. 


380  MONEY  AND   CURRENCY 

As  said  above,  however,  the  Secretary  should  be  authorized 
to  accept  from  banks  other  securities  than  government  bonds. 
These  are  not  normal  banking  assets.  If  a  bank  is  forced  to 
buy  government  bonds  for  use  as  security  for  deposits  of  Treas- 
ury funds,  the  profit  on  such  deposits  is  not  large  enough  to 
warrant  the  payment  of  interest;  but  if  banks  could  put  up 
other  kinds  of  security,  such  as  normally  form  part  of  their 
assets,  their  income  from  loans  based  on  money  received 
from  the  Treasury  would  be  pure  profit,  which  might  properly 
be  shared  with  the  government.1 

LITERATURE 

WHITE,  Money  and  Banking,  Book  III,  chaps,  xvi  and  xvii ;  F.  A. 
CLEVELAND,  The  Bank  and  the  Treasury ;  Report  of  the  Indianapolis 
Monetary  Commission,  Part  II ;  C.  F.  DUNBAR,  Economic  Essays,  chaps, 
xii-xv ;  Sound  Currency  (publications  of  the  Sound  Currency  Committee, 
New  York  Reform  Club)  ;  DAVID  KINLEY,  The  History,  Organization, 
and  Influence  of  the  Independent  Treasury  of  the  United  States  ;  J.  F. 
JOHNSON,  Proposed  Reforms  of  the  Monetary  System  {Annals  of  the 
American  Academy  of  Political  and  Social  Science,  March,  1898); 
C.  A.  CONANT,  Principles  of  Money  and  Banking  (New  York,  1905); 
annual  reports  of  the  Secretary  of  the  Treasury,  and  of  the  Comptroller 
of  the  Currency,  from  1893  to  date;  The  Currency,  report  of  the  Special 
Currency  Committee  of  the  New  York  Chamber  of  Commerce. 

1  In  February,  1907,  Congress  enacted  a  law  containing  these  two  important 
provisions:  (i)  national  banks  are  permitted  to  retire  by  the  deposit  of  lawful 
money  circulation  to  the  amount  of  $9,000,000  in  any  one  month ;  (2)  the  Secre- 
tary of  the  Treasury  is  given  authority  to  deposit  in  national  banks  money  re- 
ceived from  customs  duties  as  well  as  tlrat  received  from  other  sources.  This  law, 
giving  larger  freedom  to  the  banks  and  to  the  Secretary  of  the  Treasury,  should 
have  a  beneficial  effect  in  periods  of  monetary  stringency;  yet  it  is  far  from  being  a 
satisfactory  and  scientific  modification  of  our  monetary  system. 


APPENDIX 


I.  GOLD  STANDARD  ACT  OF  MARCH  14,  1900' 

CHAPTER  41.  —  An  act  to  define  and  fix  the  standard  of  value,  to  maintain  the  parity 
of  all  forms  of  money  issued  or  coined  by  the  United  States,  to  refund  the  public 
debt,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  America  in  Congress  assembled,  That  the  dollar  consisting  of 
twenty-five  and  eight  tenths  grains  of  gold  nine  tenths  fine,  as  estab- 
lished by  section  thirty-five  hundred  and  eleven  of  the  Revised 
Statutes  of  the  United  States,  shall  be  the  standard  unit  of  value, 
and  all  forms  of  money  issued  or  coined  by  the  United  States  shall 
be  maintained  at  a  parity  of  value  with  this  standard,  and  it  shall  be 
the  duty  of  the  Secretary  of  the  Treasury  to  maintain  such  parity. 


MAINTENANCE  OF  RESERVE  FUND 

SEC.  2.  That  United  States  notes,  and  Treasury  notes  issued  under 
the  act  of  July  fourteenth,  eighteen  hundred  and  ninety,  when  pre- 
sented to  the  Treasury  for  redemption,  shall  be  redeemed  in  gold  coin 
of  the  standard  fixed  in  the  first  section  of  this  act ;  and  in  order  to 
secure  the  prompt  and  certain  redemption  of  such  notes  as  herein 
provided  it  shall  be  the  duty  of  the  Secretary  of  the  Treasury  to  set 
apart  in  the  Treasury  a  reserve  fund  of  one  hundred  and  fifty  million 
dollars  in  gold  coin  and  bullion,  which  fund  shall  be  used  for  such 
redemption  purposes  only;  and  whenever  and  as  often  as  any  of  said 
notes  shall  be  redeemed  from  said  fund  it  shall  be  the  duty  of  the 
Secretary  of  the  Treasury  to  use  said  notes  so  redeemed  to  restore 
and  maintain  such  reserve  fund  in  the  manner  following,  to  wit:  First, 
by  exchanging  the  notes  so  redeemed  for  any  gold  coin  in  the  gen- 
eral fund  of  the  Treasury ;  second,  by  accepting  deposits  of  gold  coin 
at  the  Treasury  or  at  any  subtreasury  in  exchange  for  the  United 
States  notes  so  redeemed ;  third,  by  procuring  gold  coin  by  the  use 
of  said  notes,  in  accordance  with  the  provisions  of  section  thirty-seven 

1  From  Laws  of  the  United  States  Relating  to  the  Coinage  (Washington,  1904). 


382  MONEY  AND   CURRENCY 

hundred  of  the  Revised  Statutes  of  the  United  States.  If  the 
Secretary  of  the  Treasury  is  unable  to  restore  and  maintain  the  gold 
coin  in  the  reserve  fund  by  the  foregoing  methods,  and  the  amount 
of  such  gold  coin  and  bullion  in  said  fund  shall  at  any  time  fall  below 
one  hundred  million  dollars,  then  it  shall  be  his  duty  to  restore  the 
same  to  the  maximum  sum  of  one  hundred  and  fifty  million  dollars 
by  borrowing  money  on  the  credit  of  the  United  States,  and  for  the 
debt  thus  incurred  to  issue  and  sell  coupon  or  registered  bonds  of 
the  United  States,  in  such  form  as  he  may  prescribe,  in  denomina- 
tions of  fifty  dollars  or  any  multiple  thereof,  bearing  interest  at  the 
rate  of  not  exceeding  three  per  centum  per  annum,  payable  quarterly, 
such  bonds  to  be  payable  at  the  pleasure  of  the  United  States  after 
one  year  from  the  date  of  their  issue,  and  to  be  payable,  principal 
and  interest,  in  gold  coin  of  the  present  standard  value,  and  to  be 
exempt  from  the  payment  of  all  taxes  or  duties  of  the  United  States, 
as  well  as  from  taxation  in  any  form  by  or  under  state,  municipal,  or 
local  authority;  and  the  gold  coin  received  from  the  sale  of  said 
bonds  shall  first  be  covered  into  the  general  fund  of  the  Treasury 
and  then  exchanged,  in  the  manner  hereinbefore  provided,  for  an 
equal  amount  of  the  notes  redeemed  and  held  for  exchange ;  and  the 
Secretary  of  the  Treasury  may,  in  his  discretion,  use  said  notes  in 
exchange  for  gold,  or  to  purchase  or  redeem  any  bonds  of  the  United 
States,  or  for  any  other  lawful  purpose  the  public  interests  may  re- 
quire, except  that  they  shall  not  be  used  to  meet  deficiencies  in  the 
current  revenues.  That  United  States  notes  when  redeemed  in  accord- 
ance with  the  provisions  of  this  section  shall  be  reissued,  but  shall 
be  held  in  the  reserve  fund  until  exchanged  for  gold,  as  herein  pro- 
vided ;  and  the  gold  coin  and  bullion  in  the  reserve  fund,  together 
with  the  redeemed  notes  held  for  use  as  provided  in  this  section, 
shall  at  no  time  exceed  the  maximum  sum  of  one  hundred  and  fifty 
million  dollars. 

SEC.  3.  That  nothing  contained  in  this  act  shall  be  construed  to 
affect  the  legal-tender  quality  as  now  provided  by  law  of  the  silver 
dollar,  or  of  any  other  money  coined  or  issued  by  the  United  States. 


DIVISIONS  OF  ISSUE  AND  REDEMPTION  ESTABLISHED 

SEC.  4.  That  there  be  established  in  the  Treasury  Department,  as 
a  part  of  the  office  of  the  Treasurer  of  the  United  States,  divisions 
to  be  designated  and  known  as  the  division  of  issue  and  the  division 


APPENDIX  383 

of  redemption,  to  which  shall  be  assigned,  respectively,  under  such 
regulations  as  the  Secretary  of  the  Treasury  may  approve,  all  records 
and  accounts  relating  to  the  issue  and  redemption  of  United  States 
notes,  gold  certificates,  silver  certificates,  and  currency  certificates. 
There  shall  be  transferred  from  the  accounts  of  the  general  fund  of 
the  Treasury  of  the  United  States,  and  taken  up  on  the  books  of  said 
divisions,  respectively,  accounts  relating  to  the  reserve  fund  for  the 
redemption  of  United  States  notes  and  Treasury  notes,  the  gold 
coin  held  'against  outstanding  gold  certificates,  the  United  States 
notes  held  against  outstanding  currency  certificates,  and  the  silver 
dollars  held  against  outstanding  silver  certificates,  and  each  of  the 
funds  represented  by  these  accounts  shall  be  used  for  the  redemption 
of  the  notes  and  certificates  for  which  they  are  respectively  pledged, 
and  shall  be  used  for  no  other  purpose,  the  same  being  held  as  trust 
funds. 

SEC.  5.  That  it  shall  be  the  duty  of  the  Secretary  of  the  Treasury, 
as  fast  as  standard  silver  dollars  are  coined  under  the  provisions  of 
the  acts  of  July  fourteenth,  eighteen  hundred  and  ninety,  and  June 
thirteenth,  eighteen  hundred  and  ninety-eight,  from  bullion  purchased 
under  the  act  of  July  fourteenth,  eighteen  hundred  and  ninety,  to 
retire  and  cancel  an  equal  amount  of  Treasury  notes  whenever  re- 
ceived into  the  Treasury,  either  by  exchange  in  accordance  with  the 
provisions  of  this  act  or  in  the  ordinary  course  of  business,  and  upon 
the  cancellation  of  Treasury  notes  silver  certificates  shall  be  issued 
against  the  silver  dollars  so  coined. 


ISSUE  OF  GOLD  CERTIFICATES 

SEC.  6.  That  the  Secretary  of  the  Treasury  is  hereby  authorized 
and  directed  to  receive  deposits  of  gold  coin  with  the  Treasurer  or 
any  assistant  treasurer  of  the  United  States  in  sums  of  not  less  than 
twenty  dollars,  and  to  issue  gold  certificates  therefor  in  denominations 
of  not  less  than  twenty  dollars,  and  the  coin  so  deposited  shall  be 
retained  in  the  Treasury  and  held -for  the  payment  of  such  certifi- 
cates on  demand,  and  used  for  no  other  purpose.  Such  certificates 
shall  be  receivable  for  customs,  taxes,  and  all  public  dues,  and  when 
so  received  may  be  reissued,  and  when  held  by  any  national  bank- 
ing association  may  be  counted  as  a  part  of  its  lawful  reserve :  Pro- 
vided, That  whenever  and  so  long  as  the  gold  coin  held  in  the  reserve 
fund  in  the  Treasury  for  the  redemption  of  United  States  notes  and 


384  MONEY  AND   CURRENCY 

Treasury  notes  shall  fall  and  remain  below  one  hundred  million  dol- 
lars the  authority  to  issue  certificates  as  herein  provided  shall  be 
suspended :  And  provided  further.  That  whenever  and  so  long  as 
the  aggregate  amount  of  United  States  notes  and  silver  certificates  in 
the  general  fund  of  the  Treasury  shall  exceed  sixty  million  dollars  the 
Secretary  of  the  Treasury  may,  in  his  discretion,  suspend  the  issue 
of  the  certificates  herein  provided  for :  And provided further,  That  of 
the  amount  of  such  outstanding  certificates  one  fourth  at  least  shall 
be  in  denominations  of  fifty  dollars  or  less:  And  provided  further, 
That  the  Secretary  of  the  Treasury  may,  in  his  discretion,  issue  such 
certificates  in  denominations  of  ten  thousand  dollars,  payable  to  order. 
And  section  fifty-one  hundred  and  ninety-three  of  the  Revised  Statutes 
of  the  United  States  is  hereby  repealed. 


DENOMINATION  OF  SILVER  CERTIFICATES 

SEC.  7.  That  hereafter  silver  certificates  shall  be  issued  only  of 
denominations  of  ten  dollars  and  under,  except  that  not  exceeding 
in  the  aggregate  ten  per  centum  of  the  total  volume  of  said  certifi- 
cates, in  the  discretion  of  the  Secretary  of  the  Treasury,  may  be 
issued  in  denominations  of  twenty  dollars,  fifty  dollars,  and  one  hun- 
dred dollars ;  and  silver  certificates  of  higher  denomination  than  ten 
dollars,  except  as  herein  provided,  shall,  whenever  received  at  the 
Treasury  or  redeemed,  be  retired  and  canceled,  and  certificates  of 
denominations  of  ten  dollars  or  less  shall  be  substituted  therefor,  and 
after  such  substitution,  in  whole  or  in  part,  a  like  volume  of  United 
States  notes  of  less  denomination  than  ten  dollars  shall  from  time  to 
time  be  retired  and  canceled,  and  notes  of  denominations  of  ten 
dollars  and  upward  shall  be  reissued  in  substitution  therefor,  with 
like  qualities  and  restrictions  as  those  retired  and  canceled. 

SEC.  8.  That  the  Secretary  of  the  Treasury  is  hereby  authorized 
to  use,  at  his  discretion,  any  silver  bullion  in  the  Treasury  of  the 
United  States  purchased  under  the  act  of  July  fourteenth,  eighteen 
hundred  and  ninety,  for  coinage  into  such  denominations  of  sub- 
sidiary silver  coin  as  may  be  necessary  to  meet  the  public  require- 
ments for  such  coin  :  Provided,  That  the  amount  of  subsidiary  silver 
coin  outstanding  shall  not  at  any  time  exceed  in  the  aggregate  one 
hundred  millions  of  dollars.  Whenever  any  silver  bullion  purchased 
under  the  act  of  July  fourteenth,  eighteen  hundred  and  ninety,  shall 
be  used  in  the  coinage  of  subsidiary  silver  coin,  an  amount  of 


APPENDIX  385 

• 
Treasury  notes  issued  under  said  act  equal  to  the  cost  of  the  bullion 

contained  in  such  coin  shall  be  canceled  and  not  reissued. 

SEC.  9.  That  the  Secretary  of  the  Treasury  is  hereby  authorized 
and  directed  to  cause  all  worn  and  uncurrent  subsidiary  silver  coin 
of  the  United  States  now  in  the  Treasury,  and  hereafter  received,  to 
be  recoined,  and  to  reimburse  the  Treasurer  of  the  United  States  for 
the  difference  between  the  nominal  or  face  value  of  such  coin  and  the 
amount  the  same  will  produce  in  new  coin  from  any  moneys  in  the 
Treasury  not  otherwise  appropriated. 

CAPITAL  OF  NATIONAL  BANKS 

SEC.  10.  That  section  fifty-one  hundred  and  thirty-eight  of  the 
Revised  Statutes  is  hereby  amended  so  as  to  read  as  follows : 

"Section  5138.  No  association  shall  be  organized  with  a  less 
capital  than  one  hundred  thousand  dollars,  except  that  banks  with  a 
capital  of  not  less  than  fifty  thousand  dollars  may,  with  the  approval 
of  the  Secretary  of  the  Treasury,  be  organized  in  any  place  the  popu- 
lation of  which  does  not  exceed  six  thousand  inhabitants,  and  except 
that  banks  with  a  capital  of  not  less  than  twenty-five  thousand  dollars 
may,  with  the  sanction  of  the  Secretary  of  the  Treasury,  be  organized 
in  any  place  the  population  of  which  does  not  exceed  three  thousand 
inhabitants.  No  association  shall  be  organized  in  a  city  the  popu- 
lation of  which  exceeds  fifty  thousand  persons  with  a  capital  of  less 
than  two  hundred  thousand  dollars." 


REFUNDING  OF  NATIONAL  DEBT 

SEC.  1 1.  That  the  Secretary  of  the  Treasury  is  hereby  authorized  to 
receive  at  the  Treasury  any  of  the  outstanding  bonds  of  the  United 
States  bearing  interest  at  five  per  centum  per  annum,  payable  Feb- 
ruary first,  nineteen  hundred  and  four,  and  any  bonds  of  the  United 
States  bearing  interest  at  four  per  centum  per  annum,  payable  July 
first,  nineteen  hundred  and  seven,  and  any  bonds  of  the  United  States 
bearing  interest  at  three  per  centum  per  annum,  payable  August  first, 
nineteen  hundred  and  eight,  and  to  issue  in  exchange  therefor  an  equal 
amount  of  coupon  or  registered  bonds  of  the  United  States  in  such 
form  as  he  may  prescribe,  in  denominations  of  fifty  dollars  or  any 
multiple  thereof,  bearing  interest  at  the  rate  of  two  per  centum  per 
annum,  payable  quarterly,  such  bonds  to  be  payable  at  the  pleasure  of 


386  MONEY  AND    CURRENCY 

the  United  States  after  thirty  years  from  the  date  of  their  issue,  and 
said  bonds  to  be  payable,  principal  and  interest,  in  gold  coin  of  the 
present  standard  value,  and  to  be  exempt  from  the  payment  of  all 
taxes  or  duties  of  the  United  States,  as  well  as  from  taxation  in  any 
form  by  or  under  state,  municipal,  or  local  authority :  Provided,  That 
such  outstanding  bonds  may  be  received  in  exchange  at  a  valuation 
not  greater  than  their  present  worth  to  yield  an  income  of  two  and 
one  quarter  per  centum  per  annum  ;  and  in  consideration  of  the  reduc- 
tion of  interest  effected,  the  Secretary  of  the  Treasury  is  authorized  to 
pay  to  the  holders  of  the  outstanding  bonds  surrendered  for  exchange, 
out  of  any  money  in  the  Treasury  not  otherwise  appropriated,  a  sum 
not  greater  than  the  difference  between  their  present  worth,  computed 
as  aforesaid,  and  their  par  value,  and  the  payments  to  be  made  here- 
under  shall  be  held  to  be  payments  on  account  of  the  sinking  fund 
created  by  section  thirty-six  hundred  and  ninety-four  of  the  Revised 
Statutes  :  And  provided  further,  That  the  two  per  centum  bonds  to  be 
issued  under  the  provisions  of  this  act  shall  be  issued  at  not  less  than 
par,  and  they  shall  be  numbered  consecutively  in  the  order  of  their 
issue,  and  when  payment  is  made  the  last  numbers  issued  shall  be  first 
paid,  and  this  order  shall  be  followed  until  all  the  bonds  are  paid,  and 
whenever  any  of  the  outstanding  bonds  are  called  for  payment  interest 
thereon  shall  cease  three  months  after  such  call ;  and  there  is  hereby 
appropriated  out  of  any  money  in  the  Treasury  not  otherwise  appro- 
priated, to  effect  the  exchanges  of  bonds  provided  for  in  this  act,  a 
sum  not  exceeding  one  fifteenth  of  one  per  centum  of  the  face  value 
of  said  bonds,  to  pay  the  expense  of  preparing  and  issuing  the  same, 
and  other  expenses  incident  thereto. 

ISSUE  OF  CIRCULATING  NOTES  TO  BANKS 

SEC.  12.  That  upon  the  deposit  with  the  Treasurer  of  the  United 
States,  by  any  national  banking  association,  of  any  bonds  of  the  United 
States  in  the  manner  provided  by  existing  law,  such  association  shall 
be  entitled  to  receive  from  the  Comptroller  of  the  Currency  circulating 
notes  in  blank,  registered  and  countersigned  as  provided  by  law,  equal 
in  amount  to  the  par  value  of  the  bonds  so  deposited  ;  and  any  national 
banking  association  now  having  bonds  on  deposit  for  the  security  of 
circulating  notes,  and  upon  which  an  amount  of  circulating  notes  has 
been  issued  less  than  the  par  value  of  the  bonds,  shall  be  entitled, 
upon  due  application  to  the  Comptroller  of  the  Currency,  to  receive 


APPENDIX  387 

additional  circulating  notes  in  blank  to  an  amount  which  will  increase 
the  circulating  notes  held  by  such  association  to  the  par  value  of  the 
bonds  deposited,  such  additional  notes  to  be  held  and  treated  in  the 
same  way  as  circulating  notes  of  national  banking  associations  here- 
tofore issued,  and  subject  to  all  the  provisions  of  law  affecting  such 
notes  :  Provided,  That  nothing  herein  contained  shall  be  construed  to 
modify  or  repeal  the  provisions  of  section  fifty-one  hundred  and  sixty- 
seven  of  the  Revised  Statutes  of  the  United  States,  authorizing  the 
Comptroller  of  the  Currency  to  require  additional  deposits  of  bonds 
or  of  lawful  money  in  case  the  market  value  of  the  bonds  held  to  secure 
the  circulating  notes  shall  fall  below  the  par  value  of  the  circulating 
notes  outstanding  for  which  such  bonds  may  be  deposited  as  security  : 
And  provided  further,  That  the  circulating  notes  furnished  to  national 
banking  associations  under  the  provisions  of  this  act  shall  be  of  the 
denominations  prescribed  by  law,  except  that  no  national  banking 
association  shall,  after  the  passage  of  this  act,  be  entitled  to  receive 
from  the  Comptroller  of  the  Currency,  or  to  issue  or  reissue  or  place 
in  circulation,  more  than  one  third  in  amount  of  its  circulating  notes 
of  the  denomination  of  five  dollars:  And  provided  further,  That  the 
total  amount  of  such  notes  issued  to  any  such  association  may  equal 
at  any  time  but  shall  not  exceed  the  amount  at  such  time  of  its  capital 
stock  actually  paid  in  :  And  provided  further,  That  under  regulations 
to  be  prescribed  by  the  Secretary  of  the  Treasury  any  national  bank- 
ing association  may  substitute  the  two  per  centum  bonds  issued  under 
the  provisions  of  this  act  for  any  of  the  bonds  deposited  with  the 
Treasurer  to  secure  circulation  or  to  secure  deposits  of  public  money ; 
and  so  much  of  an  act  entitled  "  An  act  to  enable  national  banking 
associations  to  extend  their  corporate  existence,  and  for  other  pur- 
poses," approved  July  twelfth,  eighteen  hundred  and  eighty-two,  as 
prohibits  any  national  bank  which  makes  any  deposit  of  lawful  money 
in  order  to  withdraw  its  circulating  notes  from  receiving  any  increase 
of  its  circulation  for  the  period  of  six  months  from  the  time  it  made 
such  deposit  of  lawful  money  for  the  purpose  aforesaid,  is  hereby 
repealed,  and  all  other  acts  or  parts  of  acts  inconsistent  with  the 
provisions  of  this  section  are  hereby  repealed. 

SEC.  13.  That  every  national  banking  association  having  on  deposit, 
as  provided  by  law,  bonds  of  the  United  States  bearing  interest  at 
the  rate  of  two  per  centum  per  annum,  issued  under  the  provisions  of 
this  act,  to  secure  its  circulating  notes,  shall  pay  to  the  Treasurer  of 
the  United  States,  in  the  months  of  January  and  July,  a  tax  of  one 


388  MONEY  AND   CURRENCY 

fourth  of  one  per  centum  each  half  year  upon  the  average  amount  of 
such  of  its  notes  in  circulation  as  are  based  upon  the  deposit  of  said 
two  per  centum  bonds  ;  and  such  taxes  shall  be  in  lieu  of  existing  taxes 
on  its  notes  in  circulation  imposed  by  section  fifty-two  hundred  and 
fourteen  of  the  Revised  Statutes. 

SEC.  14.  That  the  provisions  of  this  act  are  not  intended  to  pre- 
clude the  accomplishment  of  international  bimetallism  whenever  con- 
ditions shall  make  it  expedient  and  practicable  to  secure  the  same  by 
concurrent  action  of  the  leading  commercial  nations  of  the  world  and 
at  a  ratio  which  shall  insure  permanence  of  relative  value  between  gold 
and  silver. 

Approved,  March  14,  1900. 

II.  AMENDMENT  OF  GOLD  STANDARD  ACT 

CHAPTER  1007. — An  act  making  appropriations  for  sundry  civil  expenses  of  the 
government  for  the  fiscal  year  ending  June  thirtieth,  nineteen  hundred  and  four, 
and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  America  in  Congress  assembled, 

^^**F***^***** 

TRANSPORTATION  OF  SILVER  COIN  :  For  transportation  of  silver 
coin,  including  fractional  silver  coin,  by  registered  mail  or  otherwise, 
one  hundred  thousand  dollars  ;  and  in  expending  this  sum  the  Secre- 
tary of  the  Treasury  is  authorized  and  directed  to  transport  from  the 
Treasury  or  subtreasuries,  free  of  charge,  silver  coin,  when  requested 
to  do  so  :  Provided,  That  an  equal  amount  in  coin  or  currency  shall 
have  been  deposited  in  the  Treasury  or  such  subtreasuries  by  the 
applicant  or  applicants.  That  the  authority  given  to  the  Secretary  of 
the  Treasury  to  coin  subsidiary  silver  coin  by  the  eighth  section  of  an  act 
entitled  "An  act  to  define  and  fix  the  standard  of  value,  to  maintain  the 
parity  of  all  forms  of  money  issued  or  coined  by  the  United  States,  to  refund 
the  public  debt,  and  for  other  purposes,"  approved  March  fourteenth,  nine- 
teen hundred,  may  hereafter  be  exercised  without  limitation  as  to  the  amount 
of  such  subsidiary  coin  outstanding.  And  the  Secretary  of  the  Treasury 
shall  report  to  Congress  the  cost  arising  under  this  appropriation. 

#=*#:*######### 
Approved,  March  3,  1903. 


III.    DAILY  TREASURY  STATEMENT 

OFFICE  OF  THE  SECRETARY  OF  THE  TREASURY 
DIVISION  OF  BOOKKEEPING  AND  WARRANTS 
Form  772 

STATEMENT  of  the  United  States  Treasury  on  the  ist  day  of  April,  1907 
CASH   IN   THE  TREASURY 

IN  DIVISIONS  OF  ISSUE  AND  REDEMPTION 

RESERVE  FUND 
Gold  coin  and  bullion  in  Division  of  Redemption $150,000,000 


TRUST   FUNDS 

Held  for  the  redemption  of  the  notes  and  certificates  for  which  they  are  respectively  pledged. 

Division  of  Redemption  Division  of  Issue 

Gold  coin  .....     $652,191,869  Gold  certificates  outstanding    .     .  $652,191,869 

Silver  dollars      .     .     .       471,673,000  Silver  certificates  outstanding  .     .  471,673,000 

Silver  dollars  of  1890  .           6,282,000  Treasury  notes  outstanding      .     .  6,282,000 

$1,130,146,869  $1,130,146,869 

GENERAL  FUND 

Gold  coin  and  bullion    .........  .  ..........    $118,742,602.35 

Gold  certificates   .....................         42,018,390.00 

Standard  silver  dollars  ...................  7,372,824.00 

Silver  certificates       ....................  4,710,967.00 

Silver  bullion   ......................  2,476,508.50 

United  States  notes  ....................  4,934,562.00 

Treasury  notes  of  1890      ..................  10,259.00 

National  bank  notes      ...................         10,388,420.00 

Subsidiary  silver  coin    ...................  7>375>5J9-95 

Fractional  currency  ....................  158.60 

Minor  coin  .......................  893,730.28 

$198,923,941.68 
In  National  Bank  Depositaries  — 

To  credit  of  the  Treasurer  of  the  United  States      .     .   $154,092,962.09  • 

To  credit  of  disbursing  officers  .........        11,142,717.52 

$165,235,679.61 
In  Treasury  of  Philippine  Islands  — 

To  credit  of  the  Treasurer  of  the  United 

States   ...........  $1,600,710.87 

To  credit  of  United  States  disbursing 

officers  ...........     2,287,002.60 


Awaiting  reimbursement  — 

Bonds  and  interest  paid    ...........  596,606.35 

$368,643,941.11 
Liabilities  — 

National  bank  5  per  cent  fund  .........  $23,137,965.82 

Outstanding  checks  and  warrants  ........  11,512,982.42 

Disbursing  officers'  balances      .........  67,498,279.72 

Post-Office  Department  account     ........  12,184,720.25 

Miscellaneous  items  .............  1,441,989.94       II5>775  9^g  15 

Available  cask  balance  ..............     $252,868,002.96 

389 


IV.    MONTHLY  CIRCULATION   STATEMENT 


TREASURY  DEPARTMENT 
OFFICE  OF  THE  SECRETARY 
Division  of  Loans  and  Currency 
Form  No.  1028 


CIRCULATION   STATEMENT 
April  i,  1907 


GENERAL  STOCK  OF  MONEY  IN 

HELD  IN  TREASURY  AS  ASSETS 

THE  UNITED  STATES 

OF   THE    GOVERNMENT2 

March  i, 

April  i, 

March  i, 

April  i, 

1907 

1907 

1907 

1907 

Gold  coin  (including  bul- 

lion in  Treasury)  .     .     . 
Gold  certificates  1     ... 

#1,604,972,427 

#1,611,373,750 

#265,993,746 
44,623,470 

#268,742,602 
42,018,390 

Standard  silver  dollars     . 
Silver  certificates  !    .     .     . 

561,866,530 

561,969,530 

6,955,749 
7,37o,5n 

7,372,824 
4,710,967 

Subsidiary  silver      .     .     . 

128,134,441 

128,435,053 

Treasury  notes  of  1890 

6,385,000 

6,282,000 

17,909 

10,259 

United  States  notes      .     . 
National  bank  notes     .     . 

346,681,016 

346,681,016 
597,212,063 

7,753,498 
i3>584,999 

4,934,562 
10,388,420 

Total 

#3,244,382,436 

*3,*5.,9S3,4" 

1353,66^.4 

$345,553>544 

MONEY  IN  C 

RCULATION 

March  i, 
1907 

April  i, 
1907 

April  i, 
1906 

January  i, 
1879 

Gold  coin  (including  bul- 
lion in  Treasury)  .     .     . 
Gold  certificates  l    .    .     . 
Standard  silver  dollars     . 
Silver  certificates  i  .     .     . 
Subsidiary  silver      .     .     . 
Treasury  notes  of  1890 
United  States  notes     .     . 
National  bank  notes     .     . 

#692,895,812 

6oi,459,399 
82,917,781 
464,622,489 
120,773,109 
6,367,091 

338,927,5  l8 
582,758,023 

#690,439,279 

6io,i73,479 
82,923,706 
466,962,033 
121,059,533 
6,271,741 

341,746,454 
586,823,643 

$643,993,307 
489,830,619 
81,711,436 
465,110,695 
109,489,339 
7,768,095 
337,524,o8i 
541,077,216 

#96,262,850 
21,189,280 
5,790,721 
413>36o 
67,982,601 

310,288,5113 
3T4,339,398 

Total 

#2  890  721  222 

#2  906  399  868 

#2  676  ?O4  788 

#816  266  721 

Population  of  the  United  States  April  i,  1907,  estimated  at  85,720,000;  circulation  per 
capita,  $33.91- 


not  included  in  the  account  of  money  he! 


.te  kinds 
as  assets  of  the 


1  For 

of  money  is  held  in  the  Treasury,  and 
government. 

2  This  statement  of  money  held  in  the  Treasury  as  assets  of  the  government  does  not  include 
deposits  of  public  money  in  National  Bank  Depositaries,  to  the  credit  of  the  Treasurer  of  the  United 
States,  amounting  to  #154,092,962.09.     For  a  full  statement  of  assets  see  Public  Debt  Statement. 

3  Includes  $33,190,000  currency  certificates,  act  of  June  8,  1872. 

390 


V.   VALUE   OF   GOLD   COIN  AND    BULLION   IMPORTED 

INTO  AND   EXPORTED   FROM   THE  UNITED 

STATES,    1860-1905  l 


YEAR  ENDING 
JUNE  30 

EXPORTS 

IMPORTS 

EXCESS  OF 
EXPORTS 

EXCESS  OF 
IMPORTS 

1860 

$58,446,039 

#2,508,786 

#55>940,243 

1861 

27,423,973 

42,291,930 

#14,867,957 

1862 
1863 
1864 

21,532,892 
62,162,838 
100,661,634 

13,907,011 

5,53°>538 
11,176,769 

7,525,881 
56,632,300 
89,484,865 

1865 

58,381,033 

6,498,228 

51,882,805 

1866 

7i,i97,309 

8,196,261 

63,001,048 

1867 

39,026,627 

17,024,866 

22,001,761 

1868 

72,396,344 

8,737,443 

63,658,901 

1869 

36,003,498 

14,132,568 

21,870,930 

1870 

33,635,962 

12,056,950 

21,579,012 

1871 

66,686,208 

6,883,561 

59,802,647 

1872 

1873 

49,548,760 
44,856,715 

8,717,458 
8,682,447 

40,831,302 
36,174,268 

1874 

34,042,420 

19,503,137 

14,539,283 

1875 

66,980,977 

13,696,793 

53,284,184 

1876 

31,177,050 

7,992,769 

23,184,341 

'877 

26,590,374 

26,246,234 

344,140 

1878 

9,204,455 

*3>33°>215 

4,125,760 

1879 

4,587,614 

5,624,948 

1,037,334 

1880 

3,639,025 

80,758,396 

77,H9,37i 

1881 

2,  565;  I32 

100,031,259 

97,466,127 

1882 

32,587,880 

34,377,054 

1,789,174 

1883 

11,600,888 

17,734,149 

6,133,261 

1884 

41,081,957 

22,831,317 

18,250,640 

1885 

8,477,892 

26,691,696 

18,213,804 

1886 

42,952,191 

20,743,349 

22,208,842 

1887 

9,70I,l87 

42,910,601 

33,209,4I4 

1888 
1889 

18,376,234 
59,952,285 

43,934,317 
10,284,858 

49,667,427 

25,558,o83 

1890 

17,274,491 

12,943,342 

4,331,149 

1891 

86,362,654 

18,232,567 

68,130,078 

1892 

5°.'I25'i27 

49,699,454 

495,873 

1893 
1894 
1895 

108,680,844 
76,978,061 
66468,481 

21,174,381 
72,449,119 
36,384,760 

87,506,463 
4,528,492 
30,083,721 

1896 

112,409,947 

33,525,065 

78,884,882 

1897 
1898 
1899 

40,361,580 
15,406,391 
37,522,086 

85,014,780 
120,391,674 
88,954,603 

44,653,200 
104,985,283 
S*A32,5*7 

1900 
1901 

48,266,759 

53,l85,i77 

44,573,184 
66,051,187 

3>693>575 

12,866,010 

1902 

48,568,950 

52,021,254 

3,452,304 

1903 

47,090,595 

44,982,027 

2,108,568 

1904 

81,459,986 

99,055,368 

17,595,382 

1905 

92,594,024 

53,648,961 

38,945,063 

1  The  figures  for  1860  to  1903  are  from  the  Statistical  Abstract  for  1904 ;  those  for  1904  and  1905 
were  furnished  by  Hon.  George  E.  Roberts,  Director  of  the  Mint. 

39' 


VI.    GOLD   PRICE  OF  BAR   SILVER1 

Highest,  Lowest,  and  Average  Price  of  Bar  Silver  in  London,  per  Ounce  British 
Standard  (0.925),  since  1833,  and  tne  Equivalent  in  United  States  Gold  Coin 
of  an  Ounce  1000  Fine,  taken  at  the  Average  Price. 


Calendar 
years 

Highest 
quotation 

Lowest 
quotation 

Average 
quotation 

Value  of  a 
fine  ounce 
at  average 
quotation 

Calendar 
years 

Highest 
quotation 

Lowest 
quotation 

Average 
quotation 

Value  of  a 
fine  ounce 
at  average 
quotation 

d. 

d. 

d. 

d. 

d. 

d. 

1833 

59i 

582 

59& 

#1.297 

1869 

61 

60 

6o/5 

#1.325 

1834 

6o| 

59f 

59li 

i-S'S 

1870 

6oi 

6oi 

6oA 

-328 

1835 

60 

59i 

5914 

r.3o8 

1871 

61 

6oT% 

60^ 

-326 

1836 

6o| 

59f 

60 

I-3I5 

1872 

64 

59* 

60^ 

•  322 

1837 

6o| 

59 

59A 

1-305 

1873 

59*1 

57! 

59A 

.29769 

1838 

6oJ 

59^ 

59* 

1.304 

1874 

59* 

57* 

58A 

.27883 

i839 

6o| 

60 

6o| 

I-323 

1875 

57l 

55* 

56« 

-24233 

1840 

6oj 

6o| 

6o| 

I-323 

1876 

58* 

46| 

534 

.16414 

1841 

6of 

59l 

*>A 

1-316 

1877 

58* 

53* 

54H 

.20189 

1842 

60 

59* 

59T7* 

1-303 

1878 

55* 

49* 

52| 

•15358 

1843 

59l 

59 

59A 

1.297 

1879 

53l 

48i 

54 

.12392 

1844 

59l 

59* 

59* 

1.304 

1880 

52ii 

54 

52* 

•14507 

1845 

59S 

58i 

59* 

1.298 

1881 

52| 

5o§ 

54 

.13229 

1846 

60* 

59 

59& 

1.300 

1882 

52i 

So 

541 

-13562 

1847 

6o| 

581 

59tt 

1.308 

1883 

5  'I3* 

soA 

5o& 

.10874 

1848 

60 

58* 

59* 

1.304 

1884 

54 

49* 

Soii 

.11068 

1849 

60 

99* 

59f 

1.309 

1885 

So 

46| 

48& 

.06510 

1850 

64 

59* 

6iA 

1.316 

1886 

47 

42 

451 

.99467 

1851 

64 

60 

61 

1-337 

1887 

47! 

43* 

44H 

.97946 

1852 

64 

59i 

6oJ 

1-326 

1888 

44i9s 

44 

42! 

•93974 

1853 

64 

6o| 

64 

1.348 

1889 

44! 

44i 

4»H 

•935" 

1854 

6t{ 

6o| 

64 

1.348 

1890 

54l 

43l 

47l 

1.04634 

i85S 

64 

60 

6iA 

1-344 

1891 

48| 

43* 

45A 

.98800 

1856 

62i 

60* 

6'A 

i-344 

1892 

43l 

37i' 

391 

•87145 

i8S7 

62| 

61 

6ii 

««353 

1893 

38| 

30* 

35  A 

.78030 

1858 

6i| 

6oi 

6tA 

1-344 

1894 

3if 

27 

281§ 

.63479 

'859 

62| 

6x3 

62  A 

1-360 

1895 

34 

37A 

2911 

.65406 

1860 

62  1 

64 

6il4 

1-352 

1896 

3'H 

29l 

3oll 

-67565 

1861 

6i| 

6o| 

6oi§ 

1-333 

1897 

29li 

23l 

27^S 

.60438 

1862 

6ai 

61 

61* 

1.346 

1898 

28f 

25 

26i| 

.59010 

1863 

6i| 

61 

6if 

1-345 

1899 

29 

26| 

27i7S 

.60154 

1864 

62* 

6of 

6ij 

i-345 

1900 

30* 

27 

28A 

.62007 

1865 

6if 

60* 

6«A 

1-338 

1901 

291% 

Mil 

27I3B 

•59595 

1866 

62| 

6o| 

64 

1-339 

1902 

*A 

ai!4 

24A 

.52795 

1867 

64 

6of 

6oft 

1.328 

1903 

28^ 

2lH 

24| 

•54257 

1868 

64 

6o| 

60^ 

1.326 

1904 

•57I70 

*9°5 

.59196 

1  From  Annual  Report  of  the  Director  of  the  Mint. 


392 


VII.    COMMERCIAL  RATIO   OF   SILVER  TO  GOLD1 


Year 

Ratio 

Year 

Ratio 

Year 

Ratio 

Year 

Ratio 

Year 

Ratio 

Year 

Ratio 

1687 

14.94 

1724 

IS-" 

1761 

14-54 

1798 

15-59 

1834 

15.73 

1870 

15-57 

1688 

14.94 

1725 

IS-" 

1762 

15.27 

1799 

15.74 

1835 

15-80 

1871 

15-57 

1689 

15.02 

1726 

iS-iS 

1763 

14.99 

1800 

15.68 

1836 

15.72 

1872 

I5-63 

1690 

15.02 

1727 

15.24 

1764 

14.70 

1801 

15.46 

1837 

15.83 

1873 

15-93 

1691 

14.98 

1728 

15.11 

1765 

14-83 

1802 

15.26 

1838 

I5-85 

1874 

16.16 

1692 

14.92 

1729 

14.92 

1766 

14.80 

1803 

15.41 

1839 

15.62 

i875 

16.64 

1693 

14.83 

1730 

14.81 

1767 

14-85 

1804 

I5-4I 

1840 

15.62 

!876 

17-75 

1694 

14.87 

1731 

14.94 

1768 

14.80 

1805 

15-79 

1841 

15-7° 

1877 

17.20 

-1695 

15.02 

1732 

15.09 

1769 

14-72 

1806 

I5-52 

1842 

15-87 

1878 

17.92 

,  1696 

15.00 

1733 

15-18 

1770 

14.62 

/8o7 

15-43 

1843 

15-93 

1879 

18.39 

1697 

15-20 

»734 

15-39 

1771 

14.66 

1808 

16.08 

1844 

15-85 

1880 

18.05 

1698 

iS-07 

1735 

15-41 

1772 

14.52 

1809 

15.96 

1845 

15-92 

1881 

18.25 

1699 

14.94 

*736 

15.18 

1773 

14-62 

1810 

15-77 

1846 

15.90 

1882 

18.20 

1700 

14.81 

'737 

15.02 

1774 

14.62 

1811 

15-53 

1847 

15.80 

1883 

18.64 

1701 

iS-07 

1738 

14.91 

1775 

14.72 

1812 

i6.n 

1848 

I5-85 

1884 

18.61 

1702 

I5-52 

J739 

14.91 

1776 

14-55 

1813 

16.25 

1849 

15.78 

1885 

19.41 

1703 

I5-I7 

1740 

14.94 

1777 

14-54 

1814 

15.04 

1850 

I5-70 

1886 

20.78 

1704 

15-22 

1741 

14.92 

1778 

14.68 

1815 

15.26 

1851 

15.46 

1887 

21.10 

1705 

IS-" 

1742 

14.85 

1779 

14.80 

1816 

15.28 

•  1852 

15-59 

1888 

22.00 

1706 

15-27 

1743 

14.85 

1780 

14.72 

1817 

15-11 

1853 

15-33 

1889 

22.10 

1707 

15-44 

1744 

14.87 

1781 

14.78 

1818 

15-35 

1854 

15-33 

1890 

19-75 

1708 

15-41 

'745 

14.98 

1782 

14.42 

1819 

iS-33 

1855 

15.38 

1891 

20.92 

1709 

I5-3I 

1746 

I5-I3 

1783 

14.48 

1820 

15.62 

1856 

I5-38 

1892 

23.72 

1710 

15-22 

1747 

15-26 

1784 

14.70 

1821 

15-95 

1857 

15-27 

1893 

26.49 

1711 

15.29 

1748 

IS-" 

1785 

14.92 

1822 

15-80 

1858 

15.38 

1894 

32.56 

1712 

I5-3I 

*749 

14.80 

1786 

14.96 

1823 

15.84 

1859 

15-19 

1895 

31.60 

1713 

I5-24 

1750 

14-55 

1787 

14.92 

1824 

15.82 

1860 

15.29 

1896 

30.59 

1714 

15-13 

I75i 

14-39 

1788 

14.65 

1825 

15-70 

1861 

15-50 

1897 

34-20 

I7IS 

iS-n 

1752 

14-54 

1789 

U-75 

1826 

15-76 

1862 

15-35 

1898 

35-03 

.716 

15.09 

1753 

14.54 

1790 

15.04 

1827 

15-74 

1863 

15-37 

1899 

34.36 

1717 

I5-I3 

1754 

14.48 

I79i 

15-05 

1828 

15.78 

1864 

15-37 

1900 

33-33 

1718 

IS-" 

1755 

14.68 

1792 

*S-17 

1829 

15-78 

1865 

15-44 

1901 

34-68 

1719 

15.09 

1756 

14.94 

1793 

15.00 

1830 

15.82 

1866 

15-43 

1902 

39-15 

1720 

15.04 

1757 

14.87 

1794 

iS-37 

1831 

15-72 

1867 

15-57 

1903 

38.11 

1721 

15-05 

1758 

14.85 

1795 

15-55 

1832 

15-73 

1868 

15-59 

1904 

36-15 

1722 

15-17 

1759 

M-iS 

1796 

15-65 

1833 

'5-93 

1869 

15.60 

1905 

34-92 

1723 

15.20 

1760 

14.14 

1797 

i5-4i 

1  From  Annual  Report  of  the  Director  of  the  Mint.  From  1687  to  1832  the  ratios  are  taken  from 
Dr.  A.  Soetbeer,  from  1833  to  1878  from  Pixley  and  Abell's  tables,  and  from  1879  to  1894  from  daily 
cablegrams  from  London  to  the  Bureau  of  the  Mint. 


393 


INDEX 


Aldrich  BUI,  379. 

Aldrich  report  on  wholesale  prices,  109. 
Appreciating  standard,  166-171. 
Arbitrage,  94,  98. 
Assignat.     See  France. 
Austria,  235,  310,  325;  fiat  money  in, 
292-294. 

Bagehot,  Walter,  379  n. 

Balance  of  trade,  85,  92,  97-102,  317. 

Bank,  deals  in  credit,  44-46;  operations 
of,  46-50;  bad  times,  127  ;  rate  of  dis- 
count, 138-140. 

Bank  Act  of  1844,  335. 

Bank  draft,  47,  49. 

Bank  of  England.     See  England. 

Bank  note,  42,  331-339,  370. 

Bank  reserve,  16,  50-51,  58  «.,  59. 

Barter,  I,  9. 

Belgium,  225. 

Bill  of  exchange,  44,  49. 

Bimetallism,  217-272,  302-305, 341-345. 

Bland-Allison  Act,  236,  347-354. 

Book  account,  49. 

Bowley,  in  n. 

Brassage,  179. 

Bullion,  relation  to  coin,  180-184. 

"  Bullion  Report,"  292. 

Canadian  Bank,  54  «.,  84,  338. 
Capital,  36,  135,  136  n. ;  and  credit,  51; 

analyzed,  138-145. 
Carlile,  W.  W.,  61  «.,  300  n. 
Cash,  8,  9. 

Check,  cashier's,  47  ;  certified,  46,  49. 
China,  197-199,  255,  260. 
Chinese  indemnity,  224. 
Circulation,  rapidity  of,  65-68. 


Clearing  house,  47-49. 

Coin's  Financial  School,  248. 

Commodity,  8. 

Commodity  money,  177-201. 

Commodity  rate  of  interest,  158-160. 

Confederate  money,  275. 

Confidence,  basis  of  credit,  37-41,  63- 
64,  269. 

"  Correspondent  "  (Bank),  78  n. 

Costa  Rica,  260. 

Cost,  law  of,  1 8  «.,  74-75. 

Cost  of  production,  117-120. 

Costs,  real,  120-121. 

Credit  instrument,  9,  255. 

Credit  money,  9,  25,  199,  315-339;  de- 
preciated, 268-270 ;  excessive  supply 

of»  373-375- 

Credit,  origin  of,  3-5;  definition  of,  9; 
nature  and  uses  of,  34-54 ;  based  on 
confidence,  37-41,  63-64,  269;  not 
based  on  goods,  37-41  ;  of  general 
acceptability,  42-43,  123;  of  limited 
acceptability,  44-50,  121-123  >  in  Eu- 
rope  and  Canada,  52,  54  n. ;  and 
prices,  24,  117,  121-124;  relation  of, 
to  money,  24-25,  57-65  ;  "  short  sale  " 
of  money,  62-63  >  transactions,  vol- 
ume of,  64-65. 

Crimean  War,  295. 

Currency,  defined,  8,  9;  certificates, 
48  n. ;  deposit,  44,  47,  64-65,  121  n. ; 
shipments  of,  80-84 !  supply  of,  in 
United  States,  248. 

Debasement  of  coinage,  188-190. 
Demand  and  supply,  18  «.,  55-76.    See 

also  Money. 
Denmark,  235. 


395 


396 


MONEY  AND   CURRENCY 


Deposit  currency.    See  Currency. 
Depreciating  standard.    See  Standard. 
Division  of  labor,  71. 
Dollar,  12  «.,  199-200,  217,  330  n. 
Dun's  Review,  in,  214. 

Economist  index  number,  214. 

Ecuador,  260. 

Elasticity,  need  of,  322-326 ;  plans  for, 

377-38°- 

"  Endless  chain,"  359. 
England,  237-239 ;  Bank  of,  54  ».,  58, 

335;   bank  notes  of,   291-292,  324; 

gold  standard  of,  155-156. 
Entrepreneur,  36,  131,  164-166. 
Exchange,  bill  of,  44,  49;  domestic,  77- 

84 ;    foreign,   85-102,  222-224,  309  ; 

sterling  (see  Sterling). 
Exchangeability,  essential  to  money,  3, 

u. 

Exports.    See  Foreign  trade. 
Exports  of  United  States,  101. 

Falkner,   R.  P.,   109.     See  also   Index 

number. 

Falling  prices,  127. 
Farrer,  Lord,  61  n. 
Fetter,  F.  A.,  142  n. 
Fiat  money,  177,  263-314. 
Fisher,  Irving,  142  n. 
Florin,  292-294. 

Foreign  exchange.    See  Exchange. 
Foreign  trade,  101,  256,  260. 
France,  Bank  of,  54  n. ;  bimetallism  in, 

224-227,  255  ;  paper  money  in,  311- 

313.  325»  329- 
Free  coinage,  179,  180,   184-186,   256. 

Germany,  252,  255,  325,  329,  332. 

Gold,  amount  used,  42,  207  ;  coinage  of, 
185,  186,  193  ;  cost  of  production  of, 
203-205;  exportation  of,  323,  367- 
371;  importation  of,  during  panic,  57- 
58;  output  of,  128,  129  «.,  132-133, 
183,  209,  215;  price  of,  12,  90  «., 


184,  285-290,  292^.5  shipments  of, 
89,  90^.,  97-102;  value  of,  180-187, 
250-254. 

"  Gold-bug  creditors,"  244. 

Gold  bullion,  185. 

Gold  reserve,  157  ».,  327. 

Gold  Standard  Act  of  1900,  361-367. 

Gold  standard  in  England,  155-156;  in 
Europe,  234-236,  260;  in  Japan, 
Mexico,  and  Peru,  203  ;  is  it  secure  ? 
366-380. 

Good,  economic,  9 ;  free,  9. 

Goods,  not  basis  of  credit,  38-40. 

Greece,  225. 

Greeley,  Horace,  85. 

Greenbacks,  272-290;  effect  of  cancel- 
lation of,  25  ;  "endless  chain,"  359; 
legal  tender,  42,  51,  200;  standard  of 
prices,  242 ;  depreciated,  244  ;  quan- 
tity of,  330  n. 

Gresham's  law,  194-196,  233,  237,  318. 

Guinea,  178. 

Hamilton,  Alexander,  227. 
Helm,  Elijah,  250  n. 
Holland,  234. 

Ideal  money.    See  Fiat. 

Imports  of  United  States,  101. 

Index  number,  17,  104-112,  172-175; 
and  gold,  214,  242  ;  and  greenback, 
279  ;  and  rupee,  304. 

India,  debt  of,  223-224 ;  silver  and 
wheat  in,  246,  257-260 ;  silver  fiat 
money  in,  297-305  ;  suspension  of 
free  coinage  in,  236,  252. 

Interest,  rate  of,  135-160 ;  regulates  sup- 
ply of  money,  196-198;  from  1873  to 
1895,  2435  elastic  currency  affects 
rate  of,  322-323. 

Italy,  225,  235. 

Jacob,  William,  210-211. 

Japan,  203,  260. 

Jevons,  W.  S.,  no,  132  n.,  133  n. 


INDEX 


397 


Kidd's  treasure,  124-126,  147. 
Kinley,  David,  130. 

Labor,   United  States  Department  of. 

See  Index  number. 
Latin  Union,  225,  234. 
Laughlin,  J.  L.,  in,  121  n. 
Law,  John,  304. 
Law  of  cost,  1 8  n.,  74-7  5. 
"  Lawful  money."    See  Legal  tender. 
Legal-tender  act,  272-274. 
Legal  tender,  defined,  9 ;  notes  in  bank 

reserves,  51  ;  inflation,  319. 
Legal-tender  provisions,  199-200  ;  are 

they  advisable?    330-331.     See  also 

Fiat  money. 

"  Limping  standard,"  347-354. 
Locke,  John,  20,  238,  243. 
London  money  market,  155. 
Lowndes,  Sir  William,  238. 

Macaulay,  Thomas  B.,  196,  238. 

MacLeod,  H.  D.,  34,  35. 

Mandat.    See  France. 

Marginal  utility,  18  «.,  137. 

Medium   of   exchange,   i-io.    See  also 

Money. 

Mercantile  theory,  21-22. 
Mexico,  194,  203,  255,  260-262. 
Mill,  J.  S.,  20,  34,  35,  61  «.,  67,  162, 

243- 
Mint,  Report  of  Director  of  the,  193  n. 

Mint  par,  85. 

Mint  price,  12. 

Mint  ratio,  218. 

Monetary  circulation,  9. 

Monetary    Commissions  Report,  285. 

Money,  origin  of,  2-3 ;  defined,  6-9  ; 
standard  of  prices,  12-14;  nas  no  price, 
12;  store  of  value,  14-17  ;  standard  of 
deferred  payments,  14;  and  prices, 
29-32;  never  idle,  16,  23;  value  of, 
17-33,  181-184;  changes  in  value 
of,  40 ;  basis  for  credit,  58-60 ;  de- 
mand for,  19-26,  55-76,  1 16, 181, 187  ; 


supply  of,  26-32,  55-76, 1 13-1 16, 131- 
133,  146-158,  196-200;  two  uses  of, 

5°-54- 

Money,  commodity  or  metal,  177-201. 
Money,  credit.    See  Credit  money. 
Money,  fiat,  263-290. 
Money  supply,  138. 
Money  unit,  26  n. 
Money  utility,  supply  of,  26-29. 
Multiple  standard,  172,  175. 

National  Banking  Act,  338;  banks,' 
283;  bank  notes,  274-275,  331-332. 
See  also  Bank  note. 

National  debt,  244-245,  253. 

Nicholson,  J.  S.,  304  n. 

Norway,  235. 

Panic,  gold  imports  during,  57-58 ;  ra- 
pidity of  circulation  during,  68  ;  rate 
of  interest  during,  152;  depreciating 
standard,  169;  of  1893,  245,  257,356- 
358  ;  gold  exports  following,  369-370. 

Par  of  exchange,  85,  88-91. 

Peru,  203,  260. 

Peso,  261. 

Pierson,  N.  G.,  129  «.,  232  n. 

Population,  116-117. 

Portugal,  225. 

Pound  sterling,  218. 

Preston,  210  n. 

Price  changes,  and  credit,  64 ;  and 
foreign  trade,  99-100, 260 ;  and  money 
supply,  280-285. 

Price,  defined,  5, 9, 1 2  ;  of  gold  (see  Gold); 
importance  of,  161-176;  regulates 
supply  of  money,  196-200  ;  result  of 
both  money  and  credit,  6i;  variations 
in,  202-203,  221-222. 

Prices,  relation  of,  to  money  and  credit, 
103-134^0  money,  29-32  ;  and  money 
demand,  116-121;  and  money  sup. 
ply,  273-276;  held  higher  by  credit, 
57,  61  ;  under  elastic  credit  system, 
322-323;  reflect  value  of  gold,  13, 


398 


MONEY  AND   CURRENCY 


212-215;  reveal  value  of  money,  17- 
19;  in  United  States,  156;  and  bi- 
metallism, 241-248;  and  greenbacks, 
282-284. 

Promissory  note,  44. 

Public  Credit  Act,  282,  288,  289. 

Railroads  in  United  States,  167  n. 

Rapidity  of  circulation,  65-68. 

Rate  of  interest.    See  Interest. 

Real  costs,  120-121. 

Restriction  Act,  291. 

Resumption  Period,  283-284. 

Revenue  deficit,  367-369. 

Ricardo,  David,  190,  191  «.,  292. 

Roberts,  George  E.,  215,  287  n. 

Rogers,  Thorold,  212. 

Ruble.    See  Russia. 

Rupee.    See  India. 

Russia,  fiat  money  in,  295-297 ;    gold 

in,  310;  paper  in,  325  ;  silver  in,  255, 

260. 

Sauerbeck,  Augustus,  in,  132  »., 
133  ».,  250,  301. 

Scott,  W.  A.,  231,  265  n. 

Seager,  H.  R.,  142  n. 

Seigniorage,  187-194;  French,  227  »., 
229. 

Sherman  Act  of  1890,  354-361. 

"  Short  sale  "  of  money,  62-63. 

Siam,  260. 

Sight  exchange,  87. 

Silver,  changes  in  value  of,  250-254 ; 
dollar,  242  n. ;  output  of,  132  ;  ques- 
tion, 241-262.  See  also  Bimetallism. 

Smart,  William,  21. 

Smith,  Adam,  71,  131  «.,  170,  212. 

Soetbeer,  Adolph,  m,  210. 

Spain,  212,  235. 

Stability,  importance  of,  171,  178. 


Standard,  appreciating,  166-171 ;  com- 
modity, 174;  labor,  174;  "limping," 
347-354  5  multiple,  172,  175  ;  tabular, 
172;  utility,  173;  of  deferred  pay- 
merits,  14,  172-175;  of  prices,  12-14; 
of  value,  3,  1 3. 

Standard  money,  316. 

Sterling  exchange,  85  n.,  87,  97. 

Stock  market,  93-94,  127,  288. 

Sumner,  W.  G.,  133  n. 

Supply,  law  of,  74. 

Switzerland,  225. 

Sweden,  235. 

Tabular  standard,  172. 

Token  money,  315. 

Trade  dollar,  347. 

Treasury  notes,  319,  343. 

Treasury,  United  States,  278,  327,  330, 

367-369. 
Trusts,  254. 

United  States,  foreign  trade,  85-102, 
256;  monetary  experience,  340-365; 
supply  of  currency,  248. 

United  States  Treasury.    See  Treasury. 

Utility,  8. 

Value,  defined,  8,12;"  intrinsic,"  264  n. ; 
of  commodities,  118-119;  °f  money, 
73,  162-166  ;  and  price,  29-32  ;  stand- 
ard of,  3,  13  ;  store  of,  14-17. 

Veblen,  T.  B.,  142  n. 

Wages,  107-108,  126,  164,  1 68. 

Walker,  Francis  A.,  67. 

Wampum,  178. 

War,  276. 

Wells,  David  A.,  72  n. 

Wild-cat  currency,  60. 


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